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5 Technical Setups to Take on This Week - 38148 views
BALTIMORE (Stockpickr) -- The “summer doldrums” may be a widely known phenomenon of underperformance during the summer months, but it’s not supposed to be quite this obvious. With stocks only five trading days into June, the new month has already shed nearly 4.4% -- more than halving the S&P 500’s year-to-date performance.
While it looks like the markets will see some semblance of a bounce today, we’re far from out of the woods just yet; investors need to stay tactical right now as a result.
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That’s why we’re taking a look at five new technical setups 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.
First up this week is J.M. Smucker (SJM), a $9 billion food processing firm that’s been trending significantly higher despite broad market weakness. Smucker has been locked in an uptrending channel since the firm’s 2011 guidance bested expectations made by Wall Street analysts. Now, with shares approaching trend line support, it could be a good time to go long.
An uptrending channel is significant for traders because is provides very well defined risk and reward. In the case of J.M. Smucker, the low-risk entry comes in the form of a bounce off of the support level that shares are currently approaching. While the narrowness of the stock’s channel does make the setup a bit more challenging than the norm, that also provides relatively tight risk management.
If you do decide to take a trade on Smucker, consider a protective stop just below the channel at $76. Lower than that, the setup is no longer valid.
It shouldn’t come as a big surprise that a large number of stocks are showing off bearish technicals given the current market conditions. But there’s a common thread among those setups that’s worth drawing conclusions from right now. One strong example comes in shares of Lululemon Athletica (LULU), an apparel stock that’s up more than 22% so far in 2011. While LULU's 2011 performance had been strong to start the year, shares have been giving back much of those gains since April. Now this stock could find itself falling further in June.
Shares of Lululemon had been forming a bearish rising wedge setup, a formation that triggered a short signal on the break of the trend line support level that bounded shares to the downside until the end of last month. The wedge setup is statistically one of the most predictive technical formations, yielding a successful trade almost 90% of the time according to one study. Lululemon's wedge has done just that, falling more than $10 since the last week of May.
Even though shares are showing early signs of strength in today’s trading, I wouldn’t suggest going long just yet -- it’s important to take time horizon into perspective first and foremost. With the market reeling from a massive selloff in the last week, a short bounce in many stocks should be expected but may not halt selling in Lululemon. Wait for shares to bounce off the support range marked on the chart before trying to score a bargain price on this stock.
Lululemon was also highlighted today in "5 Stocks That Could Pop on Earnings."
A similar breakdown has been taking place in shares of Target (TGT) for the last few days. Target has been moving lower fairly consistently all year following a major gap down that was spurred by poor same store guidance numbers for the fourth quarter of 2011. But the most recent breakdown was most notable because it resulted from a move below a long-standing support level at $49.
As of yet, Target has shown few signs of a bottom -- but that could be soon to change thanks to another nearby support level. If the market is able to stage a more meaningful bounce by the week’s end, expect this retailer to halt its decline around $45. Until support gets found, however, steer clear of shares.
American Eagle Outfitters
American Eagle Outfitters (AEO), also one of the highest-yielding retail stocks, is another name that’s currently nearing support. Shares had previously been caught up in a double-top pattern, a setup that generally depicts exhaustion among buyers of a stock. As supply for shares completely absorbs bids at a set price (in this case, resistance at and around the $16.50 level), prices move lower.
American Eagle’s sell trigger came on the break below support at $13.75. While the ensuing selling shouldn’t have been particularly surprising from a technical standpoint, the closeness of the stock’s next relevant support level at $12.50 is worth noting. As with the other trades near support this week, wait for an actual bounce off of that price level before you consider taking on a position in this apparel play.
There’s something to be said about the abundance of stocks that are nearing reasonably strong support levels right now. It certainly suggests that broad market selling could be wrapping up in the near-term.
That suggestion of an impending wrap-up to broad market selling is why we’re wrapping up this week with a stock that’s offering an upside play this week. Shares of CSX (CSX) have been buoyed in 2011 by the increased competitive advantage that rising oil prices have given rail transport. Even though shares have rallied more than 15% this year, there’s still additional upside in shares.
That’s thanks to an ascending triangle setup that’s giving traders a well-defined buying opportunity in CSX. The ascending triangle is a setup that’s defined by a horizontal resistance level to the upside, and uptrending support below. As shares get squeezed closer and closer to that upside resistance level, increasingly excited buyers absorb supply of shares, increasing the potential for a breakout.
In the case of CSX, the breakout level to watch is the stock’s current resistance level at $80. If shares are able to make a sustained move above that price, it makes sense to go long. Consider a protective stop just below the 50-day moving average.
CSX is one of TheStreet Ratings' top-rated railroad stocks.
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.