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5 Eurozone Technical Setups for Breakout Gains - views
BALTIMORE (Stockpickr) -- Europe’s back in the spotlight again, as Greece hits another speed bump on the road to financial recovery. Greece is hand-wringing over the decision to accept a 130 billion euro stabilization package that comes with strings attached -- the terms for the rescue package include austerity measures that Greek politicians aren’t agreeing to yet.
So what does all of this mean for stocks?
In late 2011, the eurozone debt debacle was a driving force in the U.S. stock market, pushing equity prices markedly lower as uncertainty in the global financial system ratcheted higher. Today, things have changed a bit. Improved investor sentiment and positive economic data are overshadowing the situation in the EU -- at least for now.
That could certainly change Greece’s ticking time bomb of a deal is allowed to fall through before the country is able to pay off its creditors. With the eurozone catching the headlines again this week, it makes sense to take a closer look at some of the technical trading setups shaping up in stocks 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 eurozone technical setups that could deliver breakout gains to your portfolio this week -- and one recap from last week’s trades.
Let's start the week with a follow-up on Rovi (ROVI), one of the stocks that we looked at last week. At the time, we were looking at an if/then trade forming in shares: If ROVI broke out above $32.50 resistance, then it made sense to buy.
Sure enough, shares broke out two days later, pushing approximately 8.5% higher and shares started to fill the gap from the beginning of November. Now the question is whether it still makes sense to hold this trade.
The short answer is yes. With the nearest overhead resistance level just shy of $40, there’s still considerable room for upside in ROVI. Remember that the gap shares are filling now is essentially a void where shares haven’t changed hands in the past. As a result, market participants aren’t likely to try to unload their positions until they get closer to previous territory.
I’d recommend shooting for that sub $40 price target in the mid-term.
Rovi shows up on a list of 13 Tech Stocks to Buy in 2012.
Next up this week is Norwegian oil stock Statoil ASA (STO). While Norway isn’t on the euro (the country stuck with the krone), Statoil’s status as a major oil producer means that the firm is still heavily impacted by the EU economy, albeit without the currency depreciation concerns felt by countries that report their numbers in euros.
From a technical perspective, Statoil has significant upside potential right now thanks to an ascending triangle that’s been forming in shares since the beginning of November. Put simple, an ascending triangle is a pattern that’s identified by a horizontal resistance level to the upside and uptrending support below. As shares bounce in between those two technically-relevant price levels, shares get squeezed against resistance, and the potential for a breakout above that barrier increases dramatically.
The breakout level to watch in Statoil right now is $27. That’s the price that’s acted as a ceiling for shares the previous three times buyers attempted to make a new high in share prices. When the breakout happens, I’d recommend placing a protective stop right at the 50-day moving average.
A very similar setup is taking shape in shares of Unilever (UN), the $94 billion Dutch-domiciled household products group that owns well-known brands such as Dove soap and Lipton tea. Like Statoil, Unilever is forming an ascending triangle setup, in this case with resistance at the $35 level. That’s the price to watch.
One way to think about how resistance levels work is that $35 is a price for Unilever where sellers become more eager to sell and take gains than buyers are to buy. When that happens, a glut of potential supply of UN shares forms above $35, and that price becomes a sort of ceiling for shares. A breakout above that level, though, indicates that buyers have finally absorbed all of the excess supply at that level, clearing the way for more upside in shares.
At first glance, one thing that’s obvious in Unilever’s chart is the abundance of gaps. Those gaps may make the chart look somewhat less well-defined than that of Statoil, but they can be ignored for all intents and purposes. Those gaps, called suspension gaps, occur because Unilever’s shares trade off U.S. hours on the London and Amsterdam stock exchanges. From a technical standpoint, they’re not significant.
Koninklijke Philips Electronics
Koninklijke Philips Electronics (PHG) is another Dutch firm that’s forming an actionable technical setup this week. In fact, this stock is another example of a triangle -- just one of a different variety. Shares of this consumer electronics maker are forming a symmetrical triangle (sometimes also called a coil), a price setup that’s formed by two converging trendlines.
In the technical lexicon, symmetrical triangles are a lot like the popular pennant pattern; the key difference is timeframe. While a pennant may form over days or weeks, symmetrical triangles form over weeks or months. In Philips’ case, the triangle we’re watching has been forming since all the way back in late October.
Often, these patterns are thought of as continuation patterns – that is, patterns that give a stock a chance to consolidate before continuing a move in its original direction. While that’s a decent rule of thumb, it’s best to look for a break outside of the triangle in either direction, then take a position in the direction of the breakout.
Either way this trade develops, I’d recommend placing a protective stop right at the 50-day moving average in case Philips makes an unexpected move against your trade.
Diageo (DEO) is a good example of a stock that doesn’t report in euros (DEO is based in London), but is highly impacted by the eurozone markets. Because this alcoholic beverage stock generates more than a quarter of its net sales from the eurozone, it makes sense to pay attention to this name this week.
The pattern in play in Diageo is an uptrending channel. As the name suggests, an uptrending channel is a setup where a stock’s trading has been bounded by dynamic support and resistance levels in an uptrend. The fact that the channel so tightly corrals DEO’s price action makes the trading implications predictable for February.
In this stock, traders should be waiting for a bounce off of resistance as an opportunity to build a long position in Diageo. Dual resistance lines mean that there’s ample supply of shares not too far overhead.
It’s also critical to wait for an actual bounce off of support before buying; support levels do eventually fail, so traders need to wait for confirmation that trendline support is going to hold up before putting cash on the line.
-- 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.