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5 Service Sector Stocks Triggering 'Buys' - views
BALTIMORE (Stockpickr) -- After yesterday’s 1.8% selloff in the S&P 500, the word “buy” may not be in your vocabulary. The 27.75-point decline in the big index marks the biggest single-day drop for stocks in 2013, not exactly the sort of milestone that most investors relish in hitting.
But it’d be a mistake to get too reactionary after just one day. After all, the big index is still up more than 4% in just the first two months of the year -- an ascent that still works out to nearly a 26% annualized return for stocks. This isn’t exactly 2008.
As a result, there are some tradable setups popping up all around us. One place that’s seeing buy signals flash more than most is the service sector. While a large number of stocks (as well as the broad market) meander sideways right now, there are some trades worth taking this week.
Today, we’ll take a technical look at five of them.
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.
So, without further ado, let's take a look at five technical setups worth trading now.
Up first is NTT Docomo (DCM), the $63 billion Japanese communication giant. The last year hasn’t exactly been fruitful for DCM shareholders. Shares have fallen around 10% in the last 12 months, dropping at the exact same time that the S&P was rallying its hardest. But as Japanese equities turn the corner, this stock is set to benefit more than most.
That’s because DCM just broke out of an ascending triangle bottom, a bullish setup that shares had been forming for the last quarter. The ascending triangle is a price pattern that’s formed by a horizontal resistance level above shares and uptrending support below them; as shares bounce in between those two technical price levels, they were getting squeezed closer and closer to a breakout above resistance. When that push through $15 happened, we’ve got our buy signal -- it’s still blaring now.
Momentum adds some extra confidence to this trade: with DCM’s 14-day RSI in a well-defined uptrend, this stock’s momentum isn’t dying off as it climbs. You may notice a lot of gaps in DCM’s price action, but you can ignore them. Those gaps, called suspension gaps, are just the result of off-hours trading in Tokyo and London; they can be ignored for technical purposes.
Another foreign communications stock that’s forming a similar pattern is Shaw Communications (SJR), the $10 billion Canadian telco. Like DCM, Shaw is forming an ascending triangle pattern -- the key differences are that SJR’s pattern is coming after a long-term uptrend and that this one hasn’t broken out yet. That gives traders a chance to get in earlier with Shaw.
Shaw Communications currently has resistance sitting right above $24. That means that a breakout above that $24 level is the buy signal for this stock.
Whenever you’re looking at any technical price pattern, it’s critical to think in terms of buyers and sellers. Triangles, rectangles and other pattern names are a good quick way to explain what’s going on in this stock, but they’re not the reason it’s tradable. Instead, it all comes down to supply and demand for shares.
Resistance at $24 is a price where there’s an excess of supply of shares; in other words, it’s a place where sellers have been more eager to take recent gains and sell their shares than buyers have been to buy. That’s what makes the breakout above $24 so significant. It indicates that buyers are finally strong enough to absorb all of the excess supply above that price level. That’s when you want to own shares.
Visa (V) is another name that’s making sideways moves after rallying hard for the better part of the last year. Shares of the payment processing giant have climbed more than 32% in the trailing 12 months, besting the broad market’s performance by a wide margin.
Now Visa’s trading in between a horizontal resistance level at $162 and horizontal support at $153. That bouncing in between two horizontal price barriers means that Visa is in a consolidation pattern called a rectangle -- in short, the pattern is common after big price moves because it gives market participants a chance to catch their breath and plan their next move. For technical traders, there’s no planning involved; just wait for the breakout above $162 or below $153, and then pile in behind in the direction of the breakout.
More often than not, rectangles are continuation patterns. And since Visa has been in a distinct uptrend, that makes an upside breakout look like a slightly more plausible scenario. But it’s critical to actually wait for shares to exit the rectangle before jumping onboard; a negative divergence in momentum right now could spell trouble for shares.
You don’t have to be an expert technical analyst to see what’s going on in microchip manufacturer and service provider Taiwan Semiconductor (TSM). TSM is currently forming an uptrending 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. And as you might expect, the ideal time to be a buyer is on a bounce off of support.
When you’re looking to buy a stock within a trend channel, buying after a bounce off of support makes sense for two big reasons: it’s the spot where shares have the furthest to move up before they hit resistance, and it’s the spot where the risk is the least (because shares have the least room to move lower before you know you’re wrong). Keep that in mind when putting in a stop loss in TSM; the 50-day moving average looks like a good dynamic level for a stop.
Keep a close eye on this one – with shares sitting right at support, it’s make-or-break time for Taiwan Semiconductor’s pattern.
I hope you’re not a shareholder in Salesforce.com (CRM). Shares of the $24 billion business software firm got unceremoniously sold off in yesterday’s trading session, falling more than 4% by the time the closing bell rang. But even though yesterday’s price action was painful, don’t be fooled -- this stock is still definitely in an uptrend, and a more attractive opportunity to be a buyer is around the corner.
The uptrending channel in Salesforce.com is much longer-term than the one in TSM, but the trading implications are exactly the same. As this stock comes down to test support, traders should be looking for CRM’s ability to catch a bid again. And just like TSM, it’s critical to wait for shares to actually stage a bounce off of support, not just fall near it. While waiting for an actual bounce will mean leaving some potential gains on the table, it also means that you’re greatly reducing your risk of jumping in just as CRM falls through support.
That’s a tradeoff I’d make all day long.
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, 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.