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BALTIMORE (Stockpickr) -- It’s a market of stocks, not a “stock market.”
As overused as that phrase may be, there’s some truth to it. And as we approach the first trading session in March, we’re seeing some stellar examples of why paying attention to that market of individual stocks could save your portfolio’s performance in 2013.
As I write, the S&P 500 is up 6.3% on the first two months of the year. No matter how you slice it, that’s some stellar performance, especially if that market momentum can hold strong as 2013 progresses. But not all stocks are taking full advantage of the rally. In fact, some of the biggest names are looking downright scary right now -- and investors who think they’re getting market-matching performance out of those names are going to be unpleasantly surprised.
So today we’re taking a technical look at the bearish price setups forming in five of the biggest 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, I take an in-depth look at big names that are telling important technical stories. Here's this week's look at the charts of five high-volume stocks to trade for gains.
Up first is PetroChina (PTR), the $252 billion Chinese oil and gas giant. PTR has turned out some uninspiring performance in the last year, slipping around 7% in those 12 months while the rest of the broad market rallied. And now investors looking for more upside had better keep looking.
That’s because PTR is currently forming a double top pattern, a setup that’s formed by two swing highs that top out at approximately the same price level. PetroChina’s first top came in back in October, and shares topped out for their second time in January. The sell signal for this setup comes on a breakdown through support at $130. If PetroChina can’t catch a bid below that support level, you don’t want to own it.
Momentum adds some extra evidence for downside in PetroChina. 14-day RSI broke its long-term uptrend at the start of this month, and it’s been trending lower ever since. Since momentum is a leading indicator of price, that’s an important indication that shares are losing steam at an increasing pace. While I wouldn’t recommend unloading shares unless $130 gets taken out, traders will want to keep a close eye on this name in March.
Exxon Mobil (XOM) is another huge energy stock that’s looking bearish right now -- albeit for different reasons. With correlations high within the energy sector, it’s not hugely surprising to see multiple names that look negative at the same time. That said, Exxon’s setup should be a little more worrying for investors if only because it doesn’t need to see a breakdown for the sell signal to trigger – it’s already happening.
Exxon Mobil is currently forming a downtrending channel, shallow though it may be. Only two things are needed to categorize a stock’s price action as a downtrending channel: lower highs and lows. And XOM certainly has certainly met those criteria ever since its uptrend broke in late September. Even if the shallowness of the downtrend makes a severe breakdown unlikely, a slow sustained decline in share price is painful for returns -- particularly when the broad market is rallying.
Until XOM pushes through its trendline resistance level, I’d recommend staying away from this oil and gas supermajor.
You don’t have to be an expert technical analyst to see what’s going on in shares of Intel (INTC) right now. Like Exxon, Intel is currently forming a downtrending channel, a trading range that’s bounded by a trendline resistance and trendline support level. Those support and resistance levels give us a high probability range for this stock to trade within.
One key difference in Intel’s case is that its trend line support level is fanning out from its trendline resistance level. That’s a bearish sign that indicates more volatility is pouring into shares.
And volatility is like kryptonite for a stock that’s already in a downtrend.
In the shorter term, Intel has shown some more auspicious signs lately. It staged a bottoming pattern at the end of November, rallying up to hit its head on trendline resistance. But I haven’t seen any indications that buyers have the strength to push shares through that long-term resistance range that’s held INTC down for the last year.
With shares sitting right at resistance right now, risk is about as big as it gets. If you’re looking to be a buyer in this semiconductor giant, I’d recommend waiting for Intel to find support first; there are just far too many sellers still here.
Netflix (NFLX) has been one of the most consistently volatile names in the last year, slingshotted up and down by a seemingly perennial mountain of headline risk. The last few months have been positive for NFLX. The firm has staged a parabolic move since August, more than tripling as investors piled into oversold shares. But parabolic moves aren’t sustainable, and now looks like a good time for investors go take gains.
Netflix is currently forming a head and shoulders top, a pattern that indicates exhaustion among buyers. The head and shoulders is formed by two swing highs that top out around the same level (the shoulders), separated by a bigger peak called the head. The sell signal comes on the breakdown below the pattern’s “neckline” level, currently at $175.
While the head and shoulders top in Netflix is tiny, indicating short-term trading implications, the fact that it comes at the top of a parabolic move adds a lot of potential downside to this setup. I wouldn’t be surprised to see a major retracement here, especially given the volatility in this stock.
If you decide to actively short shares, do yourself a favor and keep a tight stop in place.
It’s been a very interesting year for Nokia (NOK). Just a few months ago, shares were falling like a rock, only to rebound hard on a few glimmers of life since August. But don’t think for a second that this stock’s problems are behind it.
Nokia is forming another textbook head and shoulders top pattern, one that’s got a larger initial downside target than the one in Netflix (though not nearly as deep of a secondary downside target). Nokia’s neckline is currently at $3.50. If we see a push through that support level, I’d recommend avoiding long exposure to this stock.
Lest you think that the head and 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’s good reason to keep a very close eye on NOK and NFLX this week.
To see this week’s trades in action, check out this week’s Must-See Charts portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.