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5 Technical Setups From the Twittersphere - views
BALTIMORE (Stockpickr) -- Investment ideas in 140 characters or less? That’s the argument many traders are making for Twitter, the microblogging site that boasts more than 300 million users.
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.
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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.
Direxion 3x Financial Bear ETF
First up this week is the Direxion 3x Bear ETF (FAZ), an exchange-traded fund that’s designed to deliver three times the inverse performance of the Russell 1000 Financial Services Index. In other words, when financial stocks are hurting, FAZ is rallying hard. It’s not surprising then, that this stock is breaking out right now.
Shares of FAZ broke out above $45 resistance on Thursday, with confirmation in Friday’s weak session. That breakout is the buy signal for this ETF -- and a sign that banks will likely be moving lower in the near-term. The closest resistance level for FAZ right now is just shy of $52; that price makes for a solid upside target. If FAZ can surmount the excess of supply of shares above that price, there’s considerable upside in this trade.
One thing to keep in mind with FAZ, as with any leveraged ETF, is the fact that this fund exhibits considerable tracking error over the long-term. So while the Russell 1000 Financial Services Index has fallen 20.3% year-to-date, this fund is only up 5.6%. As a trade, this ETF makes sense -- as a secular bet against financials, there are better alternatives.
ProShares Ultra Short QQQ
ETFs are popular in the Twittersphere -- and the second name on our list proves it.
Another good example of a technical breakout in a leveraged short ETF comes from the ProShares Ultra Short QQQ ETF (QID), a fund that tracks twice the inverse performance of the NASDAQ 100.
Coincidentally, $45 is the resistance level in QID that share prices had been hitting their head on for the past month or so, as traders lacked the legs to push tech stocks through the floor (a move that pushes this ETF through the ceiling). Regardless of the relative strength that we’ve seen in tech lately, this breakout is nearly identical to the setup in FAZ.
If you decide to take this trade, I’d recommend keeping a protective stop just below that $45 level. It’s the price that now acts for support on this ETF.
Taking a step away from short ETFs, Wynn Resorts (WYNN) is forming a significantly less auspicious setup right now. Although this stock has been a strong performer in 2011 (beating the S&P 500 by double digits as I write), this casino operator could be headed lower into year-end.
That’s because Wynn is currently forming a descending triangle, a pattern that’s characterized by a horizontal support level that’s acting as a “floor” for shares, and downtrending resistance above. As prices get squeezed closer and closer to support, sellers absorb some of the excess of demand for shares below, weakening support, and increasing the probability of a breakdown.
Wynn pushed below its support level in yesterday’s trading. While that’s not a sell signal in and of itself, confirmation today would be -- an open below $117 makes Wynn a short candidate. Nearest support at around $105 (adjusted for the firm’s $5 dividend payout) is a reasonable near-term target.
Wynn is one of the top holdings of Ken Heebner's Capital Growth Management, comprising 1.7% of the portfolio.
iShares MSCI Hong Kong ETF
A somewhat similar setup is taking shape in shares of the iShares MSCI Hong Kong ETF (EWH), an ETF that mirrors the performance of the Hong Kong stock market. This fund is among the most heavily trending names on Twitter this week.
By and large, correlation between worldwide stocks have been high for the last year, one side effect of the structural risks posed by macro factors like the eurozone debt crisis -- as a result, Hong Kong stocks have had major turning points in common with U.S. stocks.
But while turning points match up, performance doesn’t; Hong Kong has shown poor relative strength compared to U.S. indices, making it a good short candidate. Right now this fund is forming a setup similar to a head and shoulders top, the key difference being the fact that it lacks a right shoulder. In spite of the non-textbook nature of this setup, the trading implications are the same.
This stock becomes a short candidate on a breakdown below $15, a price level that shares were testing yesterday. If it happens, keep a protective stop at the 50-day moving average.
SPDR Gold Trust
Last up is the SPDR Gold Trust (GLD), one of the most accessible ways for stock investors to get exposure to gold prices. GLD has been a popular name in large part because of the success gold has seen over the last few years. This fund has rallied nearly 160% since the start of 2007, a period over which the S&P 500 has moved 16% in the other direction.
For reasons I’ve talked about before, gold has been under considerable pressure in the last few months. But there are reason to believe that it could headed back up -- from a technical standpoint, gold could be offering traders a second change to buy right now.
That’s because gold prices are throwing back to their previous breakout level, right around $165. If this fund can catch a bid around this newfound support level, we’ve got a buy signal on our hands. Don’t be a buyer until that bounce off of support happens.
GLD is the top holding in John Paulson's portfolio.
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.