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5 Breakout Trades You Need to See - views
BALTIMORE (Stockpickr) -- It seems that Mr. Market just got reminded that yesterday’s news of slowing growth in China was a bad thing. While the S&P 500 shed 0.39% in Monday’s session, the index is starting Tuesday off dramatically lower on overnight selling on Asian and European exchanges. U.S. investors get to be a day late and a dollar short today.
The reaction to the economic news is an about face for stock prices. It wasn’t but a couple of months ago that stocks were able to shrug off negative news in the eurozone and continue the early 2012 rally. Clearly, investors’ anxiety levels have gotten ratcheted higher in March.
Does that mean that the rally is over? Not necessarily. But increased anxiety does have implications for a slew of asset classes, stocks among them. Today, we’ll take a look at five attractive technical breakout trades that could pad your portfolio in spite of the ennui in the market right now.
For the unfamiliar, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
Here’s a look at a handful of technical setups that could deliver breakout gains to your portfolio this week.
$15 billion casino operator Wynn Resorts (WYNN) tops off our list today, due in large part to the fact that this stock has already broken out above an important resistance level. Even though the breakout has already taken place in Wynn, investors could be looking at a second low-risk opportunity to buy shares right now.
Wynn had been forming an ascending triangle bottom for the past couple of months, pushing through resistance at $122 in Friday’s trading session on a mistake filing that detailed progress on a new Macau casino. While the filing was a flub, investors are betting that it was merely released prematurely -- and shares have held above that newfound support level at $122 as a result.
A test of $122 this week creates what’s known as a “throwback” to support. Because throwbacks involve returns to support levels, they can provide low-risk entries for traders who missed out on the initial breakout.
To trade WYNN, it’s absolutely crucial to wait for a bounce off of $122 before buying. We need to see that there’s enough demand below $122 to keep that level valid as support. When the bounce happens, I’d suggest keeping a protective stop at the 50-day moving average.
DuPont (DD) is forming a similar setup right now -- shares just haven’t broken out yet. As with Wynn, the pattern we’re looking at in DuPont is an ascending triangle, a setup that’s identified by a horizontal resistance level above share prices, and uptrending support below them. Right now, that resistance level to watch in DD is $52.
In an ascending triangle, prices bounce in between those two technically relevant levels, all the while getting squeezed closer and closer to a breakout above resistance. When that breakout happens in DD, traders are signaled that the glut of supply that’s previously constrained prices below $52 has been absorbed by buyers. At that point, buying becomes a high probability trade.
When the breakout does happen, $50 support looks like a solid place for a protective stop.
DuPont shows up on a list of 10 High-Quality Stocks for 2012.
Yahoo! (YHOO) has been trading sideways for the last several months, stuck in a channel between support at $14.50 and resistance at $16.50. While that churning has been frustrating for shareholders, there are still trading implications from this setup right now.
YHOO is forming an if/then trade right now, a setup whose direction is contingent on the price action we see in shares. While setups like ascending triangles are bullish from the outset, an if/then trade doesn’t sport that same directional bias until shares actually push outside of their channel. In real world terms, Yahoo!’s setup works like this: If shares break out above $16.50, then buy. Otherwise, if shares break down below $14.50 support, then Yahoo! becomes a short candidate.
The fact that Yahoo!’s channel is well defined by support and resistance makes the trading implications all the more predictable for shares. While YHOO is testing support this week, an upside breakout has the more attractive gain potential right now. There are lots of places where shares could find support if shares to break $14.50.
Yahoo!, one of Greenlight Capital's holdings, shows up on a recent list of 4 Battleground Stocks Fought Over by the Biggest Investors.
Solar stocks have been under pressure for most of the last year, held lower as the world’s biggest solar consumers cut back on their demand for the industry’s products. $2.4 billion module maker First Solar (FSLR) has been no exception to that selling -- shares are down 80% in the last year. But the technicals indicate that there could be even more downside to shares in 2012.
That’s because FSLR broke down through $30 support in yesterday’s session. $30 had been a key support level for FSLR, a low not seen since all the way back in 2007. Support levels act like price floors for shares because they’re prices below which investors suddenly see a major bargain and demand absorbs any selling pressures. But sentiment shifts, and demand and $30 couldn’t quell selling this time around.
Momentum, as measured by 14-day RSI, gave an early warning sign for FSLR when the indicator’s uptrend got broken and replaced with a downtrend. Since momentum is a leading indicator of price, that move foreshadowed the sustained selling that this stock has seen since mid-February.
With that major price floor taken out, FSLR should have further to run lower.
First Solar shows up on a list of Solar Stocks That May Not Survive to 2014.
SPDR Gold Trust
Finally today, let’s take a look at the SPDR Gold Trust (GLD), a popular $70 billion ETF that tracks the price of gold through its holdings of physical bullion. Gold is getting shellacked today, thanks in large part to China’s declining growth and the reduced demand that could come from it. Lately, gold prices have been out of whack, mirroring equity prices -- that’s very different from just a few months ago when gold was locked in step with treasuries as an “anti-stock” trade.
But while the selling has been pronounced, there’s potential for upside in GLD thanks to an inverse head and shoulders pattern that’s been forming in shares since September. An inverse head and shoulders indicates exhaustion among sellers. With the right shoulder currently being formed, a break above this ETF’s $175 neckline would be a buy signal for shares.
Even though the head-and-shoulders (and its inverse) is likely the most well known technical pattern, it’s still a valuable one: an academic study conducted by the Federal Reserve Board of New York found that the results of 10,000 computer-simulated head-and-shoulders trades resulted in “profits [that] would have been both statistically and economically significant.” That’s a good reason to keep an eye on GLD in 2012.
To see this week’s trades in action, check out the High Volume Technicals portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.