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5 Stocks to Profit From a Snapback Rally - views
BALTIMORE (Stockpickr) -- Stocks are snapping back this week -- and a handful of names is better positioned to profit than most.
The selling we’ve seen in May has been immutable. In the 13 market sessions before yesterday’s open, 12 had been losing days; the biggest cold streak for the Dow since October 1974. Clearly, stocks were woefully oversold, so it’s really no surprise that equity prices snapped back so hard in yesterday’s session. The S&P 500 rallied 1.6%, its biggest gain in two months. And the Nasdaq Composite rallied hardest of all, climbing nearly 2.5% in the index’s biggest single-day increase of the year.
Just like the unabating selloff, it’s likely that we’ll see some continuation from this bounce in the broad market. In the S&P, momentum is pushing back out of oversold territory, and a bullish engulfing candle points toward more short-term upside as buyers pile into stocks.
To take advantage of a possible snapback rally, we’re turning our sights to five technically-strong names this week.
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.
Here’s a look at five technical setups that could deliver breakout gains to your portfolio this week.
First up is 3M Company (MMM), the $58 billion conglomerate that manufactures everything from Scotch Tape to Post-It Notes. 3M has enjoyed some decent performance in the past few quarters months, climbing some 20% off of its October lows. Now this stock could be getting ready to start the next leg of its rally.
3M has been consolidating sideways for the past few months, bouncing in a rectangle formation bounded by well-defined resistance at $90 and support at $84. That setup is making 3M a textbook example of an if/then trade right now -- put simply, if 3M breaks out above resistance, then MMM is a buy. Otherwise, if 3M falls down below support at $84, then it’s a short candidate. Typically, rectangles are continuation patterns -- that’s why the setup is more likely to point to upside right now.
When you’re trading breakouts in 3M, it’s critical not to think in terms of value. You’re not trying to buy when this stock gets expensive; instead, the buy above $90 comes when 3M pushes above a price that’s previously housed a glut of supply of shares. That pocket of supply is why that price has historically acted as a sort of “ceiling” for shares of MMM; it’s a price where sellers have been more eager to sell and take gains than buyers were to buy.
With that excess supply completely absorbed by buyers on the breakout, going long 3M becomes a high-probability trade.
Tractor Supply Company (TSCO) is another name that’s been consolidating lately – albeit in the short-term. TSCO has rallied 34% since the start of 2012, the consolidation giving traders a chance to mentally absorb the material moves that this stock has been making. Again, like MMM, the sideways channel presents an actionable if/then setup.
Resistance is at $100, with support at $90. That means that when TSCO breaks outside of that range, the high probability trade becomes positioning yourself in the direction of that breakout.
Those support and resistance prices are significant too. $100, sometimes called a stock’s century mark, is a major psychological barrier -- it’s a price that makes investors take a step back and ask, “Is TSCO really worth $100?” The fact that it acted so perfectly as resistance indicates that the psychological hang-up is the only reason for the glut of supply, not a valuation factor. That adds to the validity of the breakout if TSCO can crack $100.
Mid-cap aerospace firm Triumph Group (TGI) is another name that fits the mold of a massive rally from October, followed more recently with consolidation. That’s a good indicator that TGI is a good candidate to benefit from a snapback rally in the broad market. But the pattern that this stock is forming right now is a more significant signal for upside.
Triumph is currently forming an inverse head and shoulders pattern, a bullish setup that indicates exhaustion among sellers. Typically, the inverse head and shoulders is a reversal pattern that comes after a selloff -- the fact that this one is coming in after a rally is a strong testament to buying pressure in shares. At the same time, a bullish switchover in RSI (a momentum indicator) adds some confirmation to the upside in this setup.
TGI’s neckline is at $66; that’s the price level to watch for a breakout above.
Even though the head-and-shoulders (and its inverse) is likely the most well known technical pattern, it’s still a valuable one: an 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 a good reason to keep an eye on TGI this week.
CVS Caremark (CVS) is forming a slightly different pattern that has similar trading implications right now.
The setup to watch in CVS is an ascending triangle pattern, a setup that’s identified by a horizontal resistance level to the upside and uptrending support below shares. Essentially, as CVS bounces in between those two technically significant price levels, it’s getting squeezed closer and closer to a breakout above resistance at $46. When that happens, CVS becomes a high probability trade to the long side.
While the triangle in CVS isn’t exactly textbook, it’s short-term enough to allow some leeway in its formation. The crucial element to watch for is strong resistance at $46 and a series of higher lows form the mid-April swing bottom in shares. When the breakout triggers, I’d recommend putting in a protective stop right below the 50-day moving average.
Last up this week is BOK Financial (BOKF), a mid-cap financial services firm that’s forming a more textbook example of an ascending triangle right now.
BOKF’s triangle is a longer-term setup than the one in CVS – this one has been forming since the start of 2012. As a consequence, it’s a better-formed setup than the first one, with strong resistance at $58, and uptrending support connecting the lows from back in February through now. A crack above $58 resistance gives us our buy signal on BOKF.
Momentum, as measured by 14-day RSI, is confirming this stock’s upside bias. RSI has been locked in a solid uptrend since February, indicating that as BOKF bounced within its channel, the rate at which its price increased has itself been increasing. Since momentum is a leading indicator, that’s a good bit of supporting evidence for bulls. Still, I wouldn’t recommend entering a position until the glut of sellers gets taken out at $58.
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.