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BALTIMORE (Stockpickr) -- Can’t make heads or tails of Mr. Market this week? Let me show you five stock charts that should shed some light on what’s going on in the big-name stocks.
I’ll be frank -- it’s been an interesting week so far. I can’t remember the last time so many high-profile companies cut a third to half of their value after an earnings call that met analyst estimates. The two most notorious names are Green Mountain Coffee Roasters (GMCR) and Fossil (FOSL), but scores of other stocks (big and small) have seen major single-day drops after earnings this week too.
While many investors are going to be looking toward the headlines in Greece for some sort of explanation, there’s a more straightforward answer for what’s going on here. With few exceptions, the names getting hit hard this week are the momentum stocks from earlier this year. The sympathy crashes that other momentum names have been showing us (without any market moving news to blame) are good proof of that fact.
So it’s more a factor of investors pounding the “risk off” button on their collective keyboards than it is about eurozone debt or corporate earnings failing to meet expectations.
But because this week’s volatility is tied to momentum instead of unpredictable fundamental changes, investors who use technical strategies can eke out an advantage. Today, we’ll harness that advantage by looking at the stock charts of a handful of Wall Street’s biggest stocks.
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 Cisco Systems (CSCO), the $100 billion IP networking firm. Cisco is bound to be getting some hefty attention today after announcing its earnings numbers after the bell last night. Typically, it’s best to avoid carrying a purely technical trade over earnings -- after all, fundamental changes lead technical ones. But in Cisco’s case, what’s going on in this stock paints an important picture for the broad market.
Cisco had been forming a textbook example of a head-and-shoulders top, a pattern that indicates exhaustion among buyers. The sell signal came back earlier this month, when CSCO broke down below its neckline at $19.50, but while shares started climbing higher in yesterday’s session, it was clear that this stock hadn’t reached its minimum downside objective yet. That came into play down near support at $17.25.
Momentum, as measured by 14-day RSI, gave shorting Cisco some extra confirmation when it broke a horizontal support level, a sign that shares were likely to become more oversold in the near-term. And shares are certainly living up to that forecast this morning.
The Cisco story is important for a couple of reasons. For starters, it shows that major names are being driven by technicals in this market. And just as importantly, it shows that investors aren’t sick of selling just yet.
Michael Kors Holdings
Next up is Michael Kors Holdings (KORS), the $8 billion fashion stock that went public back in December. KORS definitely fits the momentum stock mold, up more than 52% since the first trading day of 2012.
So should traders be counting on another cataclysmic drop in shares of KORS? Maybe.
KORS has been holding long-term support at $40, a price where shares have historically caught a bid easily from the glut of demand that’s existed below that price. But with KORS testing that support level for a third time in May, a breakdown below $40 would be a very bearish signal for investors, locking in the double-top pattern that up to this point has merely been a possibility. On a shorter-term timeframe, a doji candle and a bullish engulfing pattern both indicate that KORS may live to fight above $40 for the next few sessions.
Here again though, RSI is adding some confirmation to the downside – it’s been in an unbroken downtrend since March. Still, the only signal to go short KORS is a price break below $40. When that happens, I’d recommend putting a protective stop at the 50-day moving average.
Meanwhile, Kraft (KFT) has been moving lower consistently for the past several days, dragged down by the negative sentiment in the broad market. But while that looks like a bearish sign, this stock is really offering investors a second chance of a low-risk entry right now.
That’s because KFT is throwing back to its breakout level at $38.50, a price level that’s become support ever since shares managed to push above it back in late April. While a throwback seems like a negative on its surface, in reality throwbacks are positive formations that add to the technical strength of a setup. Kraft’s ability to bounce off of support at $38.50 would add a lot of confidence over this stock’s ability to follow its technical analysis cues in May.
The throwback in Kraft is a chance at a low-risk entry because investors would be entering their position just above a support level. In other words, a break below $38.50 negates the bullish setup in shares and gives traders a quick exit signal for minimum losses.
If you want to be a buyer of KFT, I’d strongly recommend waiting for a bounce off of that $38.50 level before placing the trade.
I also featured Kraft in "10 Dow Dogs That Are Barking for Gains."
Intuitive Surgical (ISRG) is another stock that’s potentially staging a bounce this week.
Shares of ISRG have been locked in a well-defined uptrend since back in December, rallying more than 26% in the process. While shares have corrected hard in the past five trading sessions, the important thing is that they’ve retraced to trend line support, not through it. Until that support line gets broken, the uptrend is intact and ISRG’s outlook remains bullish.
Typically, the ideal time to buy in an uptrend is at support, when shares approach the glut of demand for shares that’s propelled the rally in the past. Buying at support also means that you get an immediate signal if you’re wrong -- a breakdown below trend line support is a signal to exit the trade in ISRG. Dual support at ISRG’s trend line and 50-day moving average strengthens the chances of a bounce this week.
Waiting for that bounce is critical. After all, trend lines do eventually fail -- and when they do, you don’t want to be left holding the bag. By waiting for the bounce to happen, you get an indication that ISRG can still catch a bid before before you buy.
Last up is insurance giant AIG (AIG), a stock that’s forming an almost identical setup to the one in Intuitive Surgical. AIG has rallied more than 37% this year in an orderly climb up its own trend channel. Now, with shares bouncing off of dual support at their trendline and 50-day moving average, traders have a buy signal.
For AIG, it makes sense to buy with the plan to exit the trade as shares approach trend line resistance. How close to trend line resistance you sell depends largely on your risk tolerance – shares have fallen short of resistance in the past, so risk-averse traders should opt to take gains earlier on in the ascent.
If you decide to take this AIG trade, I’d recommend keeping a protective stop just below the 50-day moving average.
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.