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5 Huge Stocks Ready to Slingshot Higher - views
BALTIMORE (Stockpickr) -- What a difference a week makes.
Just a handful of trading sessions ago, investors were incredibly anxious about buying stocks. But by signing a $40 billion monthly check for his QE3 mortgage, Ben Bernanke fixed that pretty quickly.
Nothing cures investor anxiety over stocks quite like turning flight to safety assets into toxic instruments -- and with short-term rates being held down near zero and QE3 set to materially increase the money supply, that’s exactly what the Fed has done.
It’s worth noting that QE3 is special; it’s the first round of Fed action since the market crash that’s been announced when forward inflation rates were above 2.2%. That means that the buying power of the dollar could really be diminished compared to alternatives like gold or equities.
That’s exactly why it makes sense to focus on the big stocks that could benefit the most from money piling into them. So we’re taking a technical look at five names set to slingshot higher this week.
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 big names that are telling important technical stories. Here's this week's look at the technicals of five high-volume stocks ready to move higher.
First up is McDonald’s (MCD) a stock that’s struggled this year, slipping more than 7.4% since January, a time over which the S&P 500 rallied more than 16% so far. But things are looking up for Ronald McDonald and the Hamburgler -- and more important, for investors.
That’s because the company behind the “Golden Arches” is forming a technical trading pattern that looks a whole lot like the arches -- just flipped upside down. McDonald’s is forming a double bottom pattern, formed by two swing lows that bottom out at approximately the same price level. The buy signal comes when shares push through the resistance level that separates the two bottoms; for MCD, the price was $92, and the breakout happened on Wednesday.
The fact that the breakout is so new (it was really only confirmed yesterday when shares held out above $92) and the double bottom pattern was so large means that there’s still considerable upside to be had from this setup. I’d recommend buying here with a protective stop in at the 50-day moving average.
It’s been a better year for shareholders of China Mobile (CHL) -- the biggest cellular carrier in the People’s Republic has rallied around 13.4% so far this year, falling short of the S&P, but also dramatically beating out most Chinese stocks for 2012. Like MCD, China Mobile looks primed for a move higher right now.
That’s because CHL is currently bouncing higher within an uptrending channel. In short, an uptrending channel is a sloping price range that’s bounded by a trendline support level and a trendline resistance level. The channel is a big benefit to investors: it provides a clear picture of CHL’s likely price action as the stock bounces higher off of support and bounces lower off of resistance.
For an uptrending channel, the optimal entry point comes with a bounce off of support. That’s not just because shares have the most room to run before hitting resistance – they also have the least risk. Since a breakdown below support means that the channel is no longer valid, buying close to support means that you know if you’re wrong quickly. As a result, the most logical place to put a protective stop is right below that support line.
With CHL catching a bid this week, now’s a good time to buy as long as you set your stop from the onset and you’re comfortable with that risk level.
Amazon.com (AMZN) is in rally mode right now. Shares are up more than 51% year-to-date, consistently breaking out above any price levels that put up any semblance of resistance. So now, the question is whether shares can still push through higher ground in the $260s. Investors can take a breather -- the technicals look promising.
Amazon is forming a very short-term ascending triangle pattern right now, essentially a smaller version of the setup that AMZN broke out of at the end of July. The ascending triangle is a price pattern that’s formed by a horizontal resistance level to the upside and uptrending support below shares. As AMZN bounces in between those two technically significant prices, it’s constantly getting squeezed closer and closer to a breakout above that resistance level, in this case at $262.
When that breakout happens, we’ve got a high-probability buy signal that Amazon is going to continue to make new highs. So far this summer, it’s been clear that buyers have full control in this stock. A push above $262 means that the small glut of supply of shares at that level has been absorbed by increasingly eager buyers.
American International Group
American International Group (AIG) is another name that’s forming a short-term trading pattern right now. AIG is currently in the process of forming an inverse head and shoulders pattern, a bullish setup that’s formed by two swing lows at the same level (called the shoulders, by themselves they’re a lot like a double bottom) that are separated by a deeper low called the head.
The inverse head and shoulders pattern indicates exhaustion among sellers – and judging from the rally that AIG has staged from its June lows, sellers must be pretty exhausted indeed right now. The buy signal comes when shares push through the neckline, a resistance level that’s at $35 for AIG. While the right shoulder still isn’t completely formed, a break of that $35 price is still a valid buy signal, right shoulder or not.
A couple of factors add some extra confidence to this pattern. The first is momentum, measured by 14-day RSI, which has been in an uptrend since well before AIG bottomed in June. Since momentum is a leading indicator of price, the fact that it’s still in an uptrend is a good sign. Another positive indicator is volume. Volume spiked hard when the head was formed, indicating that AIG can easily catch a bid below $33.
Still, I’d recommend sitting on the sidelines with this stock until the neckline at $35 gets broken. When it happens, keep a tight stop.
Finally, I want to follow up with a stock that we looked at earlier this month, Stryker Corp. (SYK). Like AIG, Stryker has been forming an inverse head and shoulders pattern -- just a much longer-term version of one.
This past week, shares finally broke above their $55 neckline, triggering a buy signal for traders. Now, a throwback is giving buyers a second chance at a low-risk entry on this trade. A throwback is the move back down to the neckline in shares of SYK – and it’s actually a good signal for investors.
That may seem surprising. After all, shares have been sliding – but a throwback gives SYK the chance to confirm the strength of its newfound support level at $55. I’d recommend buying this name on the next white bar day above $55.
And lest you think that the head and shoulders is too well known to be worth trading, the research suggests otherwise: a recent 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 makes both SYK and AIG worth watching closely this week.
To see this week’s trades in action, check out the Technical Setups for the Week 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.