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5 Technical Setups From the Twittersphere - views
BALTIMORE (Stockpickr) -- What’s the most powerful tool you have to generate investment ideas? Would it surprise you if the answer was Twitter?
Since its introduction, the microblogging tool has been popular among traders looking to share investment setups with the trading community. Today, with 300 million users, it’s reached a level of popularity that makes it an even more useful resource for investors looking to generate trading ideas in 140 characters or less.
Brevity has been a big part of Twitter’s success -- and a reason for the service’s popularity among traders. After all, it doesn’t take more than a few seconds to blast off a tweet about your latest trade, or thoughts about a significant market move. Third-party services such as StockTwits also aggregate stock market tweets in real time, providing an interesting sentiment gauge or an instant opinion on your latest position.
The Twittersphere heated up this summer when it was announced that a $40 million London-based hedge fund was now applying algorithms to Twitter to generate trading signals. That fund launch comes not too long after researchers at Indiana University, Bloomington found that Twitter could predict up or down days with 87.6% accuracy.
While there are still some issues with relying too heavily on Twitter for trading signals (a model with high predictive ability isn’t necessarily economically viable), the site can be a good starting point for traders looking for stocks getting attention from the investing community. With that in mind, let’s look at technical setups in five stocks and ETFs that are popular on Twitter 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 five Twittersphere technical setups that could deliver breakout gains to your portfolio this week.
Bristol Myers Squibb
First up this week is Bristol Myers Squibb (BMY), the $57 billion big pharma firm that announced over the weekend that it would be acquiring Inhibitex (INHX) in a high-profile $2.5 billion deal. The news put plenty of extra eyes on the pharmaceutical sector -- and set Twitter ablaze with trading comments about BMY. So, what’s going on in this stock?
For starters, shares of Bristol Myers Squibb broke out back in December, shoving through resistance at $33 (a price level that’s now become support). Now, shares of the firm are showing traders a throwback -- a retest of newfound support that provides a second chance at a low risk entry in this stock.
Throwbacks are a sort of double-edged sword. While they provide a low risk entry opportunity (where your risk is defined as the tiny space between share prices and a stop loss level right under support), research tells us that stocks that throw back ultimately rally less hard than those that just keep going.
Even so, BMY’s uptrend has been solid for the last quarter. Traders should consider going long on a bounce off of $33, then slapping a protective stop under the 50-day moving average.
Bristol-Myers, one of the highest-yielding drug stocks, shows up on a recent list of 7 Pharma Buys for 2012. I also recently featured the stock in " 7 Relative Strength Stocks to Beat the Market in 2012."
Netflix (NFLX) is another name that’s had plenty of eyes on it lately -- although perhaps not in a good way. In the last year, shares of the DVD and streaming video firm have fallen more than 45% following a series of very public management flubs.
But shares of the firm rallied close to 14% yesterday on considerable volume, and shares are already up more than 40% in 2012. So what’s going on with this stock?
Buyout rumors and the launch of the firm’s U.K. service have been two big factors in the stock’s rally year-to-date. Technicals have played another critical role. Back in late December, we took a look at the if/then setup in Netflix, concluding that, “If shares break out above [$75] resistance, then buy.”
While that trade has already played out as planned, yesterday’s price action pushed shares through another important resistance level and into the empty space where shares had previously gapped down. There looks to be additional upside in this stock right now. Play the momentum with a tight stop.
For another technical take on Netflix, check out yesterday's "6 Stocks Rising on Huge Volume."
Another strong momentum name in 2012 has been household name weight loss stock Weight Watchers (WTW). This new year’s resolution play has rallied more than 24% already in 2012, providing substantial gains for investors who were already up around 50% in 2011.
But the rally may not be over yet; Weight Watchers is testing resistance at $70 right now. In the past, $70 has acted like a sort of price ceiling for shares. That’s because it’s a price level above which there’s a glut of supply of shares that overwhelms buyers’ demand -- if buyers can get the legs to absorb that supply, WTW could run much higher this year.
While $70 is a notable resistance level, it’s much weaker than $77 resistance (the dashed line). If shares can push above $70, it makes sense to go long with a price target at that $77 level. I’d recommend keeping a protective stop just below the 200-day moving average.
Weight Watchers is one of TheStreet Ratings' top-rated consumer services stocks.
Endo Pharmaceuticals (ENDP) is on the other side of the spectrum. Rather than testing resistance, shares of Endo Pharmaceuticals broke down through $34 support yesterday, threatening shareholders with additional downside in shares.
Today, traders should be watching for confirmation in the form of a second consecutive red open below that support level.
The break in momentum, as measured by 14-day RSI, gave traders an early warning sign that shares could be headed lower, but any actual signal to go short only comes if this week’s breakdown is confirmed by price action.
Meanwhile, Goldman Sachs (GS) is starting to show off some ostensibly bearish signs in its chart. The $46 billion financial giant is currently forming a descending triangle, a setup that makes Goldman a short candidate if it breaks down below $85 support.
Here’s what to watch.
A descending triangle can be identified by a horizontal support level below price action and downtrending resistance above it. As GS bounces in between those to technical levels, shares get squeezed closer and closer to a breakdown below support; when that happens, traders have the trigger to go short.
Until that break happens, this isn’t a high-probability trade.
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.