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5 Technical Setups for Breakout Gains - 25843 views
BALTIMORE (Stockpickr) -- It looks like Mr. Market is still making up his mind this week.
While yesterday’s 2.18% climb in the S&P 500 was a significant technical day for stocks -- it officially pushed stocks above the consolidation range they’d set following last Tuesday’s tentative market bottom -- early trading action is looking to reverse most of those gains already today. Now we’re left with the question of whether Tuesday really was the bottom of this correction.
For our purposes as traders, the answer has to be “yes” -- at least for now. Even with today’s market action yet to be seen, the fact that we pushed above last week’s sideways volatility-fest is signal enough to start looking for long-side trades. Analysis paralysis is a major challenge in markets like this one; the keys to success are going to be tight stops and disciplined following of technical signals.
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And the signals are starting to present themselves again. This week, we’ll take a look at five technical setups that could provide breakout gains this week.
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.
Here’s a look at this week’s setups.
Research In Motion
2011 has been a rough year for BlackBerry maker Research In Motion (RIMM). Shares of the company have been more than halved this year as concerns over receding market share and waning growth prospects have prompted a selling spree for shareholders. But there could be upside to shares this month -- it all comes down to whether RIM can stomach a push above a key price level.
Right now, RIM is facing strong support at $30 per share. Put simply, above $30 is an area where RIM faces a glut of supply of shares -- it’s the place where investors think the stock looks “expensive”, so it acts as a sort of technical ceiling for share prices. That’s what makes a potential breakout above $30 so significant. It suggests that the supply/demand equation for RIM’s shares has shifted, and shares actually have room to run higher.
As traders, we’re looking for a breakout above $30. Once that happens, RIMM becomes a high-probability upside trade. Until then, don’t try to anticipate the move -- this stock has a proclivity for swimming with cement shoes.
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Online retail giant Amazon.com (AMZN) hasn’t been spared from the selloff, but looking at price action in the bigger picture, a very different story emerges. Shares of Amazon have actually been locked in an uptrending channel since the start of the year, a contributing factor to the stock’s nearly 13% rally year-to-date. Now this stock is giving traders another chance at upside.
Amazon found trend line support in the height of the market crash, bouncing higher as demand for shares overwhelmed selling from the weak-handed shareholders of this stock. With long-standing support holding up again for Amazon, now looks like a solid time to be a buyer. Swing traders should hold shares until AMZN pushes towards the upper trend line of the channel.
For a more risk-resistant entry in Amazon, wait for shares to push above the 50-day moving average before going long. However you trade this stock, I’d recommend keeping a protective stop just below that blue trend line support level.
Changyou.com (CYOU) is another technology name that’s showing traders a similar setup right now. Like Amazon, Changyou is bouncing off of channel support this week -- and providing a second chance (well, actually a third chance) at a stock that’s already rallied 52% in 2011. Risk-seeking traders should opt for this name instead of AMZN.
CYOU actually managed to break out above its 50-day moving average already, a move that indicates buying strength in shares. That said, the same rules apply if you’re considering taking a position in this stock: a protective stop just below that trend line support level is crucial.
I’d recommend waiting for the first white bar day in this stock before taking on a position -- shares could give back some of yesterday’s gains today.
Changyou.com shows up on a recent list of 10 Stocks to Buy as Short-Sellers Swarm.
Whole Foods Market
Now onto a channel of a different sort. Natural and organic grocery chain Whole Foods Market (WFM) is currently locked in a sideways consolidation channel, a setup that provides us with a solid “if/then trade” right now.
Basically, an if/then trade is a setup whose direction is contingent on the stock’s price action as it exits a horizontal trading range. If shares of WFM break above resistance, then it’s time to buy. If shares of WFM fall below support, then this stock becomes a short candidate. Either way, the trading plan can only be dictated by the price action in shares.
If/then trades are effective because of the shift in supply and demand for shares – while investors may think that shares of WFM look cheap at its $54 support level, those same investors may hit a panic sell if shares slide much below that “cheap” price level. When that happens, demand for shares drops, supply increases, and eager sellers overwhelm the market.
Remember, this isn’t a high-probability trade until those conditions are met.
Whole Foods was recently highlighted in "2 Pair Trades for a Volatile Market."
Last up this week is Activision Blizzard (ATVI), a $13 billion video game publisher that’s showing us a bit of a modified if/then trade. While the trade in Whole Foods doesn’t become a high-probability setup until shares actually break out of their channel, Activision Blizzard is currently presenting a tradable play within the channel right now.
The recent bottom in the broad market is being mirrored in Activision -- albeit with more volatility. So, just like the S&P 500, Activision officially pushed above the consolidation range it’d been in following last Tuesday’s tentative market bottom. That means that this stock could move toward the top of its range (between the dashed black lines) this week.
To justify buying this stock, we’ll first need to see confirmation that yesterday’s rally wasn’t just a fluke. For that, we’ll want to see shares close above that $10.75 breakout level. If they do, then it makes sense to buy ATVI on its next white bar day. I’d recommend a protective stop just below $10.40.
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.