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5 Facebook Sympathy Trades From the Tech Sector - views
Facebook officially goes public in the primary market this evening and opens for its first day of regular trading on the Nasdaq tomorrow morning. That means that all of the retail investors clamoring to buy shares of the social network will get their chance tomorrow. But for everyone else, it means that stocks are going to get “sympathetic” to Facebook’s attention.
Stocks make “sympathy moves” whenever there’s a lot of action in a high-profile name. It’s the reason why all the airlines move higher when Delta (DAL) announces good earnings. It’s also the reason why big banks tend to drop as a group when a new drama emerges around Bank of America (BAC). There are a couple of reasons for sympathy moves: one is that seeing Mr. Market’s reaction to a big valuation change has implications for peer companies, and another major one is driven by flow of funds.
While we don’t yet know how investors are going to react to Facebook’s introduction to the secondary market tomorrow, it’s incredibly likely that early FB trading will introduce extra volatility into stocks, and tech names in particular. To take advantage of the volatility hike, let’s take a technical look at some of the biggest technology sector names on Wall Street.
If you're new to technical analysis, here's the executive summary:
Technicals are a study of the market itself. Since the market is ultimately the only mechanism that determines a stock's price, technical analysis is a valuable tool even in the roughest of trading conditions. Technical charts are used every day by proprietary trading floors, Wall Street's biggest financial firms, and individual investors to get an edge on the market. And research shows that skilled technical traders can bank gains as much as 90% of the time.
Every week, we take an in-depth look at large-cap stocks that are telling important technical stories. Here's this week's look at the technicals of five must-see stocks.
First up is Google (GOOG), a stock that can’t escape comparisons with Facebook. The social network is set to unseat Google’s spot as the biggest internet IPO in history when its shares finally go public tonight. But Google has some worthwhile action going on in its stock chart. That’s why traders should be paying attention to the symmetrical triangle forming in shares.
A symmetrical triangle is a pattern that’s formed by two trend lines that are converging at the same rate. Typically, it’s a continuation pattern, which means that it’s a sideways move that’s effectively a pause while traders absorb a previous move in a stock before continuing in the same direction. Since Google’s last big directional push was up from its October lows, a continuation would mean more upside for GOOG. The buy signal comes when shares break out above that upper trend line.
Symmetrical triangles are also sometimes called “coils” -- and that’s a pretty good way to explain how they behave. That’s because as the pattern progresses, Google is getting its volatility squeezed. And since volatility is cyclical, that means that the breakout from a symmetrical triangle is likely to be a fast, volatile move.
Traders should keep an eye on that trend line resistance line if they want an early warning that GOOG is a high probability trade.
Thompson Reuters (TRI) is forming a triangle of a different sort. Shares of this financial data stock have been forming an ascending triangle bottom for the past several months as shares absorbed the after effects of a big downside move.
An ascending triangle is very different from a symmetrical triangle in form and trading implications. This pattern is formed by a horizontal resistance level (in this case at $30.30) and uptrending support. Essentially, as shares bounce in between those two technical levels, TRI is getting squeezed closer and closer to a breakout above that $30.30 resistance level. When that happens, traders have a buy signal.
In more real terms, resistance at $30.30 has historically been a place where TRI buyers have encountered a glut of supply of shares; it’s a price where sellers are more eager to sell and take gains than buyers are to buy. But uptrending support indicates that buyers are still actively involved in this stock. A breakout above $30.30 tells us that the excess supply of shares that’s previously created resistance has been completely absorbed by buyers.
Once that price barrier has been taken out, TRI has much more room to run higher. Don’t be early on this trade. Wait for $30.30 to get exceeded before buying.
The exact opposite pattern -- a descending triangle -- is forming in shares of Adobe Systems (ADBE). Adobe had been rallying hard for most of 2012, pushing the stock 14.5% higher since the first trading day of the new year, but the technical pattern in shares right now points to a reversal in that bull run.
Adobe currently has horizontal support at $32 and downtrending resistance has been in place since late March. The fact that Adobe has been able to catch a bid at $32 means that there are big implications if the stock can’t bounce on another test of that level. That’s why a break below that $32 support level makes Adobe a short candidate.
Momentum, as measured by 14-day RSI, adds some confirmation to the downside setup -- it’s been in a downtrend since January. Because momentum is a leading indicator of price, an RSI downtrend greatly increases the downside risks in ADBE.
Still, I’d strongly recommend sitting on the sidelines until a sustained break below $32. After that, I’d recommend a protective stop at the 50-day moving average.
Microsoft (MSFT) is another massive technology name that’s showing traders a bearish setup right now. The pattern to watch in MSFT is a double-top, a trading setup that’s formed when a stock hits hard resistance twice at the same level, then reverses lower each time. The short signal comes when MSFT breaks down below the support level that separates the two tops.
That’s especially troubling for MSFT shareholders. Shares closed below the $30 breakdown level in yesterday’s session, a move that could be confirmed today with continuation below $30 early in Thursday’s session. While the break of $30 we’re seeing today is only on the edge of being material, it’s an opportunity to build a starter position short MSFT. An RSI breakdown into oversold territory could accelerate the selloff even more in May.
If you decide to take this trade, I’d recommend putting in a protective stop just above MSFT’s most recent swing high at $31.
Last up on our list of tech sector sympathy trades is hard drive manufacturer Seagate Technology (STX). Shares of Seagate have been locked in a steep uptrend since all the way back in October. The critical component of that uptrend is the trend line support line -- it identifies the dynamic pocket of demand that’s trailing shares as they climb higher.
Put simply, each of the last four times STX has tested support at the trendline, it’s caught a bid and moved higher; with shares testing that level today, investors could have a low-risk opportunity to buy.
A second support level at the 50-day moving average makes the setup even stronger.
Buying at support is low-risk because you know quickly whether you’re right or wrong on the trade. After all, a breakdown below that trend line is an exit signal, so the closer you are to it, the smaller the capital at risk. There’s one critical component to buying any stock at support: waiting for the bounce.
Ultimately, trend lines break. By waiting for a bounce off of trend line support, you know that STX can still catch a bid at that level before putting your money on the line. Don’t buy until that happens.
Seagate is one of the top holdings at David Einhorn's Greenlight Capital as of the most recently reported period.
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.