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BALTIMORE (Stockpickr) -- It looks like investors are getting some love this Valentine’s Day.
Major indices might be dipping into the red this morning, but investors have been swooning over stocks since the beginning of the new year. And those who bought into the rally are up around 7.5% for their trouble. That’s a prodigious rally for the first month and a half of 2012.
So is this relationship going to last? At this point, at least, it looks pretty put together. The S&P 500 has been locked above key resistance since the start of the year, sending a bullish signal to technicians that buyers are in control of the market. At the same time, the fact that traders have been shrugging off news from Europe speaks to the positive sentiment that remains in the equity market right now.
This week is going to be heavy on both earnings and economic data, two factors that have buoyed stock prices this quarter. That’s what makes it a perfect opportunity to take a look at five new technical setups in stocks for 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 a handful of technical setups that could deliver breakout gains to your portfolio this week.
Social networking site LinkedIn (LNKD) is for your professional life what Facebook is for your personal life -- it’s a way to may contacts, share industry insights, and maybe even find a new job. Ever since this 90 million-member company went public in mid-2011, there have been plenty of eyes on it, and that’s not about to change soon now that Facebook is on the path to IPO.
This isn’t the first time I’ve talked about LinkedIn as a potential trade. Back in June, we took advantage of a breakout above $85. Now, we’re seeing a similar upside seutp.
Right now, LinkedIn is testing longstanding resistance at the $92.50 level, a price that’s acted like a price ceiling for shares the past several times buyers tried to ratchet prices higher. As a result, there’s a big buy signal if shares can sustain a shove above that $92.50 price level.
Resistance levels like the one at $92.50 work because there’s a glut of supply of shares above that level. In other words, it’s a price where sellers become more willing to sell and take gains than buyers are to buy shares. When that happens, prices reverse back lower.
A breakout above that price, however, tells us that demand is in control in LNKD. That’s when it makes sense to be a buyer.
LinkedIn shows up on a list of 4 Tech Stocks for 2012.
It’s shaping up to be a stellar year for shares of payment solution firm VeriFone Systems (PAY). Shares are up an astonishing 29.5% since the first trading day in January, a massive rally spurred by analyst views that new initiatives could dramatically spur earnings.
But the rally in VeriFone is starting to lose steam this week. That’s what makes this stock’s setup so attractive right now.
VeriFone had seen strong resistance at the $45 level back toward the end of 2011, but shares sunk like a stone in the fourth quarter on guidance that Wall Street didn’t like. A turn to positive momentum at the start of this year pushed shares back up to that $45 level, but it wasn’t until earlier this month that shares actually staged a breakout above that price. That breakout sent a buy signal to traders; so how does a decline look good?
A post-breakout decline, also called a throwback, is an opportunity for shares to test newfound support at that breakout level ($45 in PAY’s case). Once shares bounce off of support, it’s an opportunity for late traders to buy with limited downside risk. Waiting for that bounce is crucial -- support levels invariably fail, and we want confirmation of support in PAY before taking a position in shares.
VeriFone shows up on a list of 4 Stocks Set for Next-Gen Mobile Boost.
Express Scripts (ESRX) is essentially forming the exact same setup right now. As with PAY, shares of this pharmacy benefit manager have been testing a resistance level into the fourth quarter of 2011, only to break out at the start of the year.
ESRX is no stranger to throwbacks -- in fact, shares actually staged a minor one immediately after the breakout above $48 in January. Now a second (more textbook) throwback is coming into play.
For Express Scripts, there’s some added assurance that a throwback in shares will be successful. For starters, that $48 support level isn’t just the breakout price, it’s also the level where the 50 and 200-day moving averages are converging. That added support increases the probability that support will hold at $48.
Also in our favor is the fact that momentum, as measured by the 14-day RSI, is locked in an uptrend at the moment despite the return to test support. Regardless of those supporting factors, we’ll still want to see a bounce before buying ESRX becomes a high-probability trade.
Next up this week is integrated gas supermajor Chevron (CVX), a stock that’s forming a bullish technical setup right now. To be sure, Chevron is forming a similar trading opportunity as many of its industry peers. That’s thanks to the sustained high price of oil we’ve seen for the last several months.
But ignore the fundamental factors for now, and this setup is a clear-cut ascending triangle opportunity.
An ascending triangle is a setup that’s identified by horizontal resistance to the upside and uptrending support below. Essentially, as share prices bounce in between those two technically relevant price levels, they get squeezed closer and closer to a breakout above resistance. When that happens, we have our buy signal for shares. For Chevron, that resistance level to watch is actually a range between $108 and $110.
Because Chevron’s upside barrier is a range, entering this stock gets slightly trickier. Risk and reward go hand-in-hand: Higher-risk traders can take a position when shares crack $108, whereas more conservative traders should wait for $110 to get broken before buying.
Either way, tight stops are crucial. Keeping a stop at the 50-day moving average is a good way to mitigate risk on this trade.
International Paper (IP) broke out yesterday, shoving its way above resistance to make a new 52-week high at $33.22. The breakout is a buy signal for traders this week. Here’s how the setup worked.
Shares of International Paper have spent most of the year stock in a horizontal range, a phenomenon that I call an If/Then setup. It’s called that because the channel provides traders with a contingent setup depending on which direction shares of IP exited the channel. Because they broke out to the upside, this stock becomes an upside trade.
The channel was relatively narrow in IP, suggesting that the target price on this stock also relatively nearby. But the potential gains get extended a bit by virtue of the fact that IP plowed its way through a new 52-week high.
With investor psychology looking strong in this stock, now looks like a favorable opportunity to be a buyer. If you decide to take this trade, I’d recommend keeping a protective stop right under $31 support.
International Paper shows up on a recent list of 4 Favorite Value Stocks.
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.