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5 Technical Trades for Tuesday - 11265 views
BALTIMORE (Stockpickr) -- The S&P 500 managed to close lower still on Monday, dunking its head a total of 2.5% since the beginning of the month. This week, the big catalyst for lower stock prices is debt. More specifically, we’re talking about the fact that the U.S. knocked its head against its debt ceiling yesterday, a move that has sparked considerable uncertainty in the marketplace.
Political debates aside, it’s not concern over U.S. default that’s sending shockwaves through the market right now -- instead, it’s uncertainty over the U.S. government’s status as the benchmark for lending quality. With rating agencies threatening to lower U.S. debt ratings should borrowing continue to run unchecked, congress will need to deliver some semblance of a deficit reduction plan to quell Wall Street’s concerns.
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Meanwhile, our focus remains on specific technical trading opportunities this week, despite the Uncle Sam-induced anxiety that’s showing itself in the markets.
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.
We’ll start off this week by looking at a battle of the international banks. Front and center is HSBC Holdings (HBC), the London-based banking firm that has vast exposure to both Asian and European markets. Right now, HSBC is showing investors a less-than-auspicious trading setup thanks to a head-and-shoulders topping pattern that’s forming in shares.
Essentially, the head-and-shoulders pattern is characterized by two peaks (the shoulders), with a higher peak between them. That formation signifies exhaustion among buyers as capital flows attempt to push shares higher, only to capitulate under profit taking at the head. Because of its unique name, the head-and-shoulders is one of the most well-known patterns among would-be traders -- and recent academic studies show that it’s also one of the most profitable.
In the case of HSBC, the pattern triggers on a break below the neckline. As such, traders will want to wait for a break below $50 before betting against shares of this banking stock. Of course, I mentioned that we’d be looking at a battle of international banks -- as such, our second banking play is an upside trade in the making.
Bank of Nova Scotia
2011 may not be turning out to be a banner year for shareholders of Canada’s Bank of Nova Scotia (BNS), but the stock could be in for upside after all thanks to a bullish ascending triangle in shares. That ascending triangle triggers on a move in Scotiabank shares above the $62 level.
That $62 level is significant because it’s a level that shares have attempted to rise above no fewer than five times, only to get pushed lower. A resistance level like that becomes an attractive buy trigger once it’s been broken above -- that’s because with asks absorbed at the $62 level, shares are free to be bid higher above that price.
The higher lows in Scotiabank’s shares show that buyers are accumulating shares, a necessary condition if a breakout is to occur. In the meantime, traders will have to wait out the breakout for this to become a high probability trade.
A big bet on Scotiabank comes from Ken Fisher at Fisher Asset Management, who had a 8.2 million-share position in the stock as of the most recent period, comprising 1.3% of his total portfolio.
A similar situation is taking shape right now in shares of major diversified restaurant operator Darden Restaurants (DRI), one of the 20 highest-yeilding leisure stocks. Like Scotiabank, Darden is seeing its shares’ price action reigned in by a horizontal resistance level above and higher lows to the downside -- the tell-tale signs of an ascending triangle.
In Darden’s case, we’re looking for a sustained break of $50 for this setup to be tradable. Shares closed above the $50 level yesterday, but we’ll want to see confirmation that they can hold that price in today’s or tomorrow’s market session. After all, shares have hit that $50 resistance level in the past only to bounce lower -- it’s crucial to make sure that we’ve got a breakout in play before going long.
If you do ultimately decide to take this trade, consider a protective stop just below the lower trend line at $47.50.
Darden, one of TheStreet Ratings' top-rated restaurant and hotel stocks, was recommended recently by Jim Cramer as one of his top restaurant stocks and by Scott Rothbort as one of several stocks for after the commodity collapse.
Defense contractor Honeywell International (HON), one of the 20 top-yielding aerospace and defense stocks, has been seeing strong performance in 2011. Shares of the $47 billion firm have already climbed more than 13% year-to-date -- more than double the performance of the broad market. But for investors looking to make a low-risk entry into this stock, the time to buy could be coming up.
That’s because Honeywell is nearing its trend line support level, a price level under which sellers are facing an abundance of demand for shares. For uptrending issues such as Honeywell, it makes sense to enter a new position (or add onto an existing position) near support levels, because the “price floor” effect for shares significantly reduces the downside risk of buying a stock that’s already had a hefty run.
There’s one caveat to that strategy, of course: Trend lines do fail eventually. To protect against that, it’s essential to wait for a bounce off of that support level to actually occur before buying. That way, you’re making sure that support is holding up before staking your cash on a position.
J.B. Hunt Transport Services
Another good example of a channel up is Arkansas-based trucking company J.B. Hunt Transport Services (JBHT), one of TheStreet Ratings' top-rated transportation infrastructure stocks. J.B. Hunt is currently locked in an uptrending channel and is nearing trend line support, the ideal low-risk entry point for shares.
One benefit to trading a channel up is the fact that both risk and reward are well defined for traders. Risk comes in the form of a stop loss level placed just below the bottom of the channel, and reward comes into play at the upper trend line -- the price target that traders are aiming for as J.B. Hunt’s shares oscillate within the channel.
As is the case with Honeywell, it’s important to wait for an actual bounce off of J.B. Hunt’s support line before going long shares.
-- 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.