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5 Technical Setups for Breakout Gains - 11344 views
BALTIMORE (Stockpickr) --
The drama is continuing across the pond this week, and it’s having a palpable impact on trading here at home.
Yesterday, credit ratings agency Standard & Poor’s dropped Italy’s debt rating down one notch, to A from A+. Let’s be honest, the move has long been overdue; compared with other Eurozone countries, Italy’s debt pricing has been off kilter for a while. While Europe helped to push the stock market lower yesterday, today’s early trading indicates that market participants had already priced in the likelihood that Italy would be downgraded.
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That’s a very good thing considering the tentative nature of the S&P 500’s rebound this month. The index is 7.56% higher since last month’s lows.
With strength continuing in stocks this week, a number of attractive technical setups are looking tradable.
Remember, 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.
iShares Barclays 20+ Year Treasury Bond ETF
Don’t let the long name fool you -- the iShares Barclays 20+ Year Treasury Bond ETF (TLT) is a fairly straightforward exchange-traded fund, providing a way to get exposure to Treasuries on the far side of the yield curve. That could be a very good thing right now given the anticipated decision by the Fed to go through with “Operation Twist," an attempt to decrease long-term rates by lengthening the duration of its portfolio.
There’s plenty of debate over whether Operation Twist will be helpful (though the consensus seems to be that it won’t be), but clearly a large-scale Treasury tradeoff by the Fed could have a big impact on treasury prices in the near-term. To be clear, I’m not advocating putting on a trade to speculate on the Fed’s moves. Instead, technical analysis dictates the high probability trade in this situation.
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Right now, we’ve got a solid upside resistance level at $115 in TLT. That’s a level that shares briefly hit their head on yesterday -- we’re that close. If shares can push through $115, I’d recommend going long this ETF with a protective stop right around $111.
It’s worth noting that treasuries and gold have been trading in lock step with each other for the last several months. That doesn’t mean that these two disparate assets are somehow being reconciled in investors’ minds -- instead, it means that gold and treasuries are anti-stock trades. The obvious implication of that is that traders should expect both assets to lose momentum if stocks suddenly start to look favorable again.
London-based offshore drilling company Ensco (ESV) got sold off alongside the rest of the energy sector in recent months, but this name has been showing outsized relative strength recently. Now, with a bullish technical formation under foot, Ensco could have further room to run. Here’s how to trade it.
Right now, Ensco is showing traders a bullish ascending triangle setup with resistance at $50. That’s the breakout level that we’d like to see before a long position in this stock becomes a high-probability trade.
An ascending triangle is a setup that’s characterized by horizontal resistance to the upside and uptrending support below. Typically, this pattern is a continuation pattern (it indicates previous price action will continue), but it can also frequently be a reversal pattern (as it is in this case).
Ensco’s resistance level at $50 isn’t particularly strong, but because it’s a price level that’s acted as support earlier this summer, before the selloff, we have enough assurance over its significance to justify a trade off of it. If this trade does trigger, I’d recommend placing a protective stop just below the pattern’s uptrending support line, currently at $46.
A very similar setup is taking place in shares of Verizon (VZ), one of TheStreet Ratings' top-rated telecom stocks. Like Ensco, this $103 billion communications stock is forming an ascending triangle bottom right now. In Verizon’s case, the breakout level to watch is right around $36.75.
Again, this is a setup where resistance isn’t particularly robust, but it’s a price level that’s acted as previous support when share prices were higher, so we have some added assurance over the significance of supply and demand at that price. For very short-term traders, the highest-probability trade on this stock is a long position to the $37.85 resistance level that shares were unable to trade above back in July. That price could be a stumbling point for shares.
If you’re a longer-term trader, you’ll want to try to capture a bigger move than that. For that reason, I’d recommend ratcheting up a trailing stop to your entry once shares get to test $37.85. That’ll give you the ability to attempt a second breakout without risking a loss on the trade.
On the other side of the trade is Alcoa (AA), the aluminum stock that’s known for being the first company to kick off earnings season each quarter (the firm’s next release comes on Oct. 12). Alcoa has taken some serious knocks in 2011, currently down more than 24% on the year. And a bearish technical pattern indicates that the firm could have further to fall.
Right now, Alcoa is forming a head-and-shoulders setup, a pattern that indicates exhaustion among buyers. The head-and-shoulders (inverse or regular) is one of the most widely known technical patterns among would-be traders, and a recent academic study of the setup’s efficacy revealed that it’s still a statistically and economically significant pattern to watch.
Don’t fall into the trap of thinking that a head-and-shoulders in Alcoa means that the stock will fall lower. Remember, AA doesn’t become a high-probability short candidate until shares sustain a break below their neckline, currently at $11.24. Investors who are long Alcoa for fundamental reasons might want to consider a stop below that point and plan on re-entering at a cheaper price.
I’ve been talking a lot about MasterCard (MA) recently == I showed you the stock in last week’s column, and the firm also showed up in yesterday’s Rocket Stocks screen. Today, I want to reiterate the trade in this stock.
Basically, MasterCard broke out as we’d hoped late last week, pushing through the $340 resistance level on higher than normal volume. Obviously, that break higher was the entry signal for this stock -- but if you missed that, you haven’t missed out entirely just yet.
Shares of MasterCard gave us a throwback to test newfound support at $340 yesterday and Friday, a move that both validates our breakout is MA and provides traders with a second chance to get into shares post-breakout. Now I’d recommend going long on the stock’s next white-bar day. I’m still recommending a protective stop just below the 50-day moving average.
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.