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BALTIMORE (Stockpickr) -- This month is still providing less than fertile ground for stock market participants -- especially with Europe and earnings season ruling the news cycle this week. That’s why it makes sense to look outside the box for trading opportunities. To do that, we’re turning to Twitter today to find five new names worth trading.
Since its introduction, the microblogging tool has been popular among traders looking to share investment setups with the trading community. Today, with 300 million users, it’s reached a level of popularity that makes it an even more useful resource for investors looking to generate trading ideas in 140 characters or less.
Brevity has been a big part of Twitter’s success -- and a reason for the service’s popularity among traders. After all, it doesn’t take more than a few seconds to blast off a tweet about your latest trade, or thoughts about a significant market move. Third-party services such as StockTwits also aggregate stock market tweets in real time, providing an interesting sentiment gauge or an instant opinion on your latest position.
The Twittersphere heated up this summer when it was announced that a $40 million London-based hedge fund was now applying algorithms to Twitter to generate trading signals. That fund launch comes not too long after researchers at Indiana University, Bloomington found that Twitter could predict up or down days with 87.6% accuracy.
While there are still some issues with relying too heavily on Twitter for trading signals (a model with high predictive ability isn’t necessarily economically viable), the site can be a good starting point for traders looking for stocks getting attention from the investing community. With that in mind, let’s look at technical setups in five stocks and ETFs that are popular on Twitter 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 Twittersphere technical setups that could deliver breakout gains to your portfolio this week.
First up on our Tweet-driven list is Coach (COH), the handbag and fashion accessory company that’s seen its shares rally more than 20% so far this year. Coach is a good example of why technical inputs can be so valuable for investors: this stock has been on a momentum tear for the last few years, and fundamentals aren’t worth much when investors are trying to determine when that rally might run out of gas.
A potentially bearish setup in shares of Coach does, though.
Right now, Coach is forming a head and shoulders top, a bearish formation that indicates exhaustion among buyers. Keep in mind that the existence of the pattern doesn’t mean that Coach’s shares are moving lower just yet -- it has to trigger first. For that short signal, shares need to break down below the neckline at $72.
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.”
At this point, it looks like the right shoulder still needs time to form in order to get a clearer picture of what’s going on in Coach. That said, if I were a Coach shareholder, I’d be keeping a very close eye on that $72 neckline.
Coach shows up on a recent list of 12 Highest-Rated Consumer Stocks Picked by S&P.
Polo Ralph Lauren
That brings us to another apparel stock that’s getting attention from Twitter this morning, Polo Ralph Lauren (RL). Back in February, positive earnings prompted RL to gap up dramatically – dramatically enough that shares have been stuck trading in a sideways consolidation channel ever since as traders weighed their next move in RL. But there’s a trade to be made in that sideways price action.
Because of that trading range, RL is forming an if/then trade right now, a setup whose ultimate direction is dependent on which way RL exits its channel. Put more simply, if RL breaks out above $180 resistance, then traders have a buy signal. Otherwise, if shares of RL fall down below $170 support, then it becomes a short candidate.
Momentum, as measured by 14-day RSI, is pretty neutral right now, which only means that RL really isn’t tipping its hand to us right now; typically, secondary indicators like momentum give some hint at which direction market participants are favoring. Waiting for the break to happen before taking a position in critical. After that, I’d recommend keeping a protective stop just on the other side of the 50-day moving average regardless of which way it happens.
2012 has been a tough year for shareholders of gold mining stock Rangold Resources (GOLD). While the broad market has climbed close to 9% since the first trading day of January, Rangold has seen its share price drop by 15% over that same time period.
Now, though, this $8 billion stock could be in store for some buying pressure.
That’s thanks to a “V-Bottom” that’s forming in shares this month. The V-Bottom isn’t as well known as many other technical patterns, but its trading implications can be every bit as impactful. Essentially, a V-Bottom is formed when a dramatic shift in sentiment causes share prices to reverse a downtrend immediately, resulting in a V-shaped bottom.
Right now, GOLD has resistance at $90, a price that needs to get broken to the upside before this V-Bottom can spur an actual change in trend. There’s a glut of supply of shares above $90, where sellers are more eager to unload shares than buyers are to buy. Once that glut gets taken out, the high probability move for GOLD turns to the upside.
Wait until a breakout above $90 before buying.
Rangold shows up on a list of 8 Stocks John Paulson Loves.
iShares MSCI Spain ETF
Spain has been getting a lot of attention from traders in the last week or two – and not the good kind. Ballooning borrowing costs for Spanish sovereign debt is being blamed for dragging down equity prices in the eurozone, and in turn here at home. Spanish stocks, and ETFs like the iShares MSCI Spain ETF (EWP) are getting stomped as a result.
Here’s what’s going on in EWP right now.
Shares of the Spanish exchange traded fund have fallen through two key support levels since the start of April, the first just below $29 and the more recent at $27.50. Missing those support levels tells us that EWP (and its underlying stocks) aren’t able to catch a bid at prices that have historically acted as price “floors” for shares; in other words, the pockets of demand at those two levels evaporated when Spain started floundering again.
Last week’s pullback looked at first glance like a bullish sign, but in reality, it just reaffirmed newfound resistance at $27.50 and gave short sellers a new low-risk entry point to bet against Spanish equities. EWP is in freefall right now -- now is still a good opportunity for shorting if traders are willing to take on the headline risk of Spain. Otherwise, it makes sense to stay away from this fund for now.
CurrencyShares Euro Trust
Another eurozone ETF that’s getting plenty of Twitter attention this morning is the CurrencyShares Euro Trust (FXE), a fund that gives investors exposure to the movement of the euro. Like EWZ, FXE isn’t looking particularly bullish right now – but there’s a more predictable move at play in this stock.
FXE is currently forming a descending triangle pattern, with horizontal support at $129.50 and downtrending resistance acting as a sort of ceiling for shares. Essentially, as FXE bounces in between those two technical price levels, it’s getting squeezed closer and closer to a breakdown below that support level at $129.50. When that happens, traders have a signal to bet against this fund.
The next-lowest support level in FXE is $126, a price that acted as a floor for units back at the start of the year. That price provides a good preliminary target when and if $129.50 gets broken to the downside. If you do decide to take this trade, I’d recommend keeping a protective stop just above the 50-day moving average.
To see these plays in action, check out the Technical Setups for the Week portfolio at 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.