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5 Stocks Worth Trading Into May - 51605 views
BALTIMORE (Stockpickr) -- The past few months have proven tough for traders -- you need only look at major banks’ financials to see that it’s true. Trading, which had previously been a last bastion of profitability during the volatility-drenched markets of 2008, is looking like a drag on earnings in the first quarter of 2011.
That difficult environment for traders isn’t likely to last much longer, however; with broad-based breakouts taking shape in major commodities, and earnings threatening to push the S&P 500 above its previous highs, market participants could see volatility re-enter the market in a meaningful way in May.
That’s why it makes sense to check out a fresh batch of promising technical setups right now.
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Remember, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's chart patterns 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 this week's potential trades.
Even though the market looks ostensibly bullish right now, the first stock on our radar this week is a bearish setup. Why bother with downside trades right now? Even though the broad market is nearly re-testing its previous highs, it’s important not to let market bias play into your trading outlook. If an attractive against-the-grain setup pops up, it’s worth taking a look.
That’s exactly what’s happening with shares of Synopsys (SNPS) right now. This $4 billion software firm is forming a nearly textbook head-and-shoulders top right now -- one that’s nearly reached its neckline trigger price.
In SNPS, it’s critical to wait for a break below the neckline before betting against shares of this stock. More specifically, it’ll be important to wait for a close below the neckline before taking a position in this stock -- shares have made more than one move below the line in the form of an intraday whipsaw. If you do take this trade, put a protective stop right around $27 to protect against a fake out.
Meanwhile, there are some worthwhile upside trades setting up right now as well. The first comes from internet authentication servicer Verisign (VRSN), which is showing traders an ascending triangle setup right now. Shares will need to break above $37.50 resistance before this stock becomes buyable.
An ascending triangle setup is a formation that’s characterized by a horizontal upside resistance level, and uptrending support below. As shares get squeezed toward that glut of supply at the stock’s resistance level, the chances for a breakout above the price barrier become significantly greater. The trade signal occurs on that move above the resistance level -- not before.
With a secondary support level at the 50-day moving average, risk is seriously mitigated in shares of Verisign. April 28 earnings could be a strong catalyst for the move higher, although price action near the apex of the triangle could spur a breakout earlier than that.
One big bet on Verisign comes from Renaissance Technologies, which owns 3.3 million shares of the stock as of the most recently reported period.
Another ascending triangle is taking shape in shares of AES (AES) right now. While an electric utility like AES may not be most investors’ idea of a prototypical trading vehicle, this stock has had a volatile run over the last six months or so -- certainly enough price action to justify taking a trade on this stock.
In the case of AES, the breakout level comes at $13.50. As with VRSN, it’s essential to wait for the breakout to occur before going long shares of this stock. That’s because a breakout above $13.50 means that supply of shares has been absorbed by buying pressures and sellers won’t be as eager to part with shares at lower levels. Until that happens, going long this stock isn’t a high probability trade.
Scientific instrument Bruker (BRKR) has had a strong run in 2011 -- shares have already rallied 21% since the first trading day in January, and even more over the past six months. That upward trajectory has locked shares of BRKR in a “channel up,” a channel that’s banded by trend line support and resistance levels.
Essentially, a channel up gives traders the tool to anticipate price action in this stock -- price action is much more likely to bounce between the support and resistance trend lines than it is to move outside the channel. And for investors, buying at trend line support provides an ideal entry point for shares. With BRKR nearing that support level right now, going long on a bounce higher could be a solid move.
Another channel worth watching right now is the horizontal consolidation channel that’s been reigning in price action in shares of Ecopetrol (EC). Unlike the channel up, a sideways consolidation channel doesn’t have any directional bias -- that’s why I like to refer to them as “if/then trades.”
Because price movement is sideways, it doesn’t make sense to take a position while shares trade within the channel. Instead, it’s best to wait for a breakout in either direction -- here’s where the if/then element comes in. If shares break above resistance, go long; otherwise, if shares tumble through support, this becomes a short play. Either way this trade pans out, consider a protective stop just inside the channel.
To see these plays 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.