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5 Huge Stocks Ready to Slingshot Higher - views
BALTIMORE (Stockpickr) -- All traders needed was a day of burgers and beers on the Fourth of July to get back into buying mode this morning. Oh, and central bank intervention -- that helped too.
China offered markets a surprise rate cut, a move that got mirrored by the European Central Bank this morning as the ECB cut its own main interest rate to a historic low of 0.75%. The rate cuts are designed to help support floundering growth in China and speed recovery in the eurozone, where lowered cost of capital should help spur economic activity. That’s why the moves are helping to push worldwide share prices higher this morning.
Like I said last week, higher ground in the S&P 500 shouldn’t be a big surprise. The bear trade was getting too crowded to make sense, especially with technical and fundamental arguments piling up in favor of the bulls. Of course, that doesn’t mean that Mr. Market’s headed straight up from this point on, but it does significantly skew the outcomes in favor of buyers in July.
We’re seeing that play out technically in a handful of the biggest stocks out there. Today, we’ll take a look at how to trade these huge names.
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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.
They don’t get any bigger than Apple (AAPL). At $560 billion, Apple is the most valuable firm in the world, so it’s no great shock that investors pay attention to AAPL’s every move with baited breath. Lately, those moves haven’t been so good: Apple’s down more than 5% since the beginning of April. But that could be about to change.
Apple’s been in an uptrend for a while now, but that uptrend accelerated at the start of the year as the Cupertino, California-based firm drove its way to a 52-week high at $644 in April. Since then, Apple corrected alongside the broad market, a move that scared the weak hands out of the stock. But one thing that many investors ignored was the fact that Apple’s primary uptrend was still intact through it all.
Now Apple is bouncing higher off of that trend line support level and providing investors with a buying opportunity. After all, the best time to buy a stock in an uptrend is on a bounce off of support.
Momentum offers some extra evidence for upside in Apple – RSI has been in an uptrend since the middle of May. Since momentum is a leading indicator of price, that’s a good sign for this stock.
Berkshire Hathaway (BRK.B) is another name that’s showing investors bullish technicals right now. As with Apple, shares of the conglomerate have been in an uptrend since before the start of 2012, but unlike Apple, it’s not the uptrend that’s significant here. Instead, the fact that Berkshire’s trend lines are converging is key.
For months now, Berkshire’s price action has been bounded by a trend line resistance level to the upside and by trendline support to the downside. Those levels are converging right now, forming a pattern called a rising wedge. That pattern is currently pointing to increased upside in shares.
So why is the wedge in Berkshire significant? Thing of it this way: trend line support is a level that indicates a glut of demand from buyers, while trend line resistance indicates a glut of supply from sellers. Because they’re converging, we know that buyers are becoming increasingly bullish at the same time that sellers are becoming increasingly eager to sell and take gains. As those two groups run into each other, the potential for a big move grows. After all, if buyers can completely absorb all of the supply overhead, then the biggest upside barrier for Berkshire no longer exists.
Shares are testing a breakout above trend line resistance right now. If that breakout is confirmed, I’d recommend buying shares.
Berkshire was also featured recently in "5 Big Stocks You Can Buy Dirt Cheap."
It’s been a challenging year for Exxon Mobil (XOM) shareholders. Over the course of 2012, shares have struggled to stay at breakeven on the year, spending most of their time at lower levels as falling oil prices threatened Exxon’s profitability. But shares could be in for higher ground in the near-term.
Exxon is currently forming an inverse head and shoulders pattern. The head and shoulders is probably the most well-known technical pattern out there, identified by two swing lows (the shoulders) that are separated by a deeper low (the head). The pattern signals exhaustion among sellers, with a buy signal coming in if shares can move above their “neckline” level. In Exxon’s case, that’s $87.
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.”
Even though XOM is under some selling pressure this morning, momentum looks bullish right now. Still, I’d recommend waiting for the breakout above $87 before buying.
CVS Caremark (CVS) is having a good year in 2012. Shares of the $61 billion pharmacy stock have rallied more than 17% so far this year. And the pattern in shares points to higher ground yet to come.
CVS has been forming a shallow ascending triangle pattern since the middle of April, with resistance just above $46 and uptrending support below shares. In an ascending triangle, shares bounce in between two technical price levels (horizontal resistance and uptrending support), all the while getting squeezed closer and closer to a breakout above resistance. That breakout is the buy signal; for CVS, it happened on Friday, when shares shoved above that horizontal blue line.
It’s important to remember what resistance is: It’s a price above which there’s a glut of supply of shares. Because CVS pushed above resistance, we’ve got an indication that buyers have absorbed any excess supply being offered by sellers at that level. For that reason, CVS don’t have an upside barrier nearby, and the high-probability trade is on the long side.
There’s a similar setup shaping up in IBM (IBM) right now -- it’s just not quite as far along.
Right now, IBM is forming an ascending triangle bottom, with resistance at $200 and uptrending support right at the 200-day moving average. While the ascending triangle typically occurs when shares are in an uptrend (as with CVS), IBM has been in a downtrend since the start of May. Ultimately, the particulars of the pattern are a whole lot less important than what’s causing it. And for an ascending triangle, what’s causing it is horizontal resistance and uptrending support.
$200 is an important psychological level because it’s a large round number. For that reason, it’s a price level that investors tend to notice, and a place where there’s an increased likelihood of sellers looking to take gains and exit their trades because IBM looks “expensive”. But psychological resistance levels like that also have a tendency to get broken easily.
When $200 resistance in IBM breaks, we’ve got a buy signal on our hands.
IBM, one of Ken Fisher's holdings, shows up on a recent list of 10 Century-Old Blue-Chip Stocks Still Earning Their Keep.
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.