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5 Technical Setups to Watch - 16659 views
BALTIMORE (Stockpickr) -- The market continues to get knocked around on the heels of cautious statements from Standard & Poor’s regarding the U.S. government debt rating. While S&P didn’t alter its rating on U.S. debt, the ratings firm lowered its outlook, which opens the possibility of a lowered rating should the powers that be in Washington fail to fix the deficit spending that’s been ballooning the national debt for decades.
That move has had unsurprising effects on the broad market as market participants react to doubts in the safety of the No. 1 flight-to-safety investment.
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But it’s doubtful that the effects will be long-felt. Market futures started off flat (albeit slightly skewed upwards) this morning, as a number of large firms’ positive earnings announcements hit Wall Street. Those contradictions in market bias are confusing more than a few investors right now -- all the more reason to turn to technical trading setups to build an investment case right now.
Remember, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's chart patterns 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 potential trades.
2011’s been a very strong year thus far for shares of Irish biotech firm Elan (ELN) -- shares have already rallied around 40% year-to-date. Now that ascent could be accelerating as investors approach the firm’s earnings date.
Shares of Elan have been trading higher in an uptrending channel since the end of the summer. Simply put, a channel up is a range that’s defined by a dynamic support level on the downside and a dynamic resistance level on the upside. Those two price barriers give traders a high level of predictability over Elan’s price movement.
Right now, though, the interesting play in Elan is the test of trendline resistance as the company approaches the top of the channel. Tomorrow’s earnings make for perfect timing -- the stock could get shoved above the top of the channel on good numbers.
If that’s the case, the trend has officially accelerated, and it’s time to go long. On a break of trend line resistance, keep a protective stop just inside the channel.
A similar setup is taking place in shares of Greif (GEF), an Ohio-based packaging company. Like Elan, shares of Greif are locked in a channel up setup, but unlike the biotech, this stock is posing the more traditional upside play of the two. That’s because shares of Greif are about to stage a bounce off of trend line support.
In this case, the ideal trade comes as shares make another oscillation from the bottom of the channel to the top. As a technical trader, though, the goal isn’t to capture the entire move -- instead, it’s to capture the majority of it and substantially limit the risks involved in this trade.
To do that, it’s crucial to wait for a bounce to occur in Greif before buying shares.
Even though the setup forming in Wyndham Worldwide (WYN) may look similar to the two above, it actually carries drastically different implications for shares of this $5.3 billion hospitality company. The key to the difference comes from the convergence of the trend lines.
That convergence makes Wyndham’s pattern a rising wedge, a bearish setup that’s also one of the most statistically significant technical formations out there. Bearishness gets sparked in Wyndham on a break below the lower trend line. It’s especially crucial to wait for that trend line break before betting against shares since this stock can continue to move considerably higher in the pattern before the buy signal triggers.
It’s extremely important not to take a position in this trade early. If shares do trigger a short trade, consider a protective stop just above the 50-day moving average.
A more bullish setup is taking place right now for shares of cleverly named wholesale power generation firm NRG Energy (NRG). That’s because NRG is currently forming a bullish inverse head-and-shoulders setup.
An inverse head-and-shoulders is characterized by three troughs: two shoulder troughs and a deeper head trough in between them. When shares make a definitive break above neckline level, the stock becomes a buy.
Even though NRG has consolidated in the neckline area for a couple of weeks, shares still have yet to make a sustained move above the blue line; every attempt thus far has resulted in a reversal the next day. Keep that factor in mind should you decide to take the trade.
Confirmation comes on two consecutive white bars that close above neckline level.
Sally Beauty Holdings
Finally, we’ve got an “if/then trade” in shares of Sally Beauty Holdings (SBH) this week. Basically, an if/then trade is a setup that’s contingent on a particular directional bias being identified in a stock. While all technical trading should be contingent on shares breaking through a predetermined trigger point, most trades are already directional when they’re identified -- an if/then trade isn’t.
Right now, shares of SBH are showing us a consolidation channel. If shares break above $15, then this is a long-side buy. If shares break below $12.50, then this is a short-side sell. Either way this trade ultimately reconciles itself, keep a protective stop just inside the channel.
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.