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5 Technical Trades From Your Twitter Feed - views
BALTIMORE (Stockpickr) -- April has had anything but a strong start. Just five trading sessions into the new month, the S&P 500 has already given back close to 2% of its 2012 gains.
Now, with sentiment turning on traders, it makes sense to look outside the box for trading opportunities. That’s why we’re turning to Twitter today to find five new names worth trading.
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.
If any stock is getting positive attention right now, it’s Priceline.com (PCLN) -- shares of the $38 billion travel stock have been on fire in 2012, rallying more than 63% year-to-date. And that upside momentum isn’t showing signs of abating at this point.
Priceline broke out above a minor resistance level on Monday, sending a message to traders that buyers are still clearly in control of shares. This stock is one particularly gleaming example of a name that’s rallying in spite of market weakness in the very short term. For that reason, it’s a stock that anxious investors are turning to in search of strength. Now Monday’s breakout provides newcomers with a relatively low-risk entry point.
The flipside of having such strong momentum is the fact that this stock’s Relative Strength Index has become overbought -- but don’t be thrown off by RSI tipping the scales right now. In fact, overbought RSI is statistically more likely to stay overbought than it is to reverse. One look at just how long Priceline’s RSI has remained above 70 provides good evidence of that.
If you decide to be a buyer of PCLN here, I’d strongly recommend placing a protective stop just below $730.
Now, let’s move from one momentum stock onto another. Real estate website Zillow (Z) has been on fire this year, climbing more that 71% since the first trading day of January. From a technical standpoint, there’s reason to expect more of the same in this stock too.
That’s because Zillow formed a rounding pattern from mid-February to the end of March, only breaking out at the start of this month. A rounding pattern (more commonly found when a stock bottoms) indicates a gradual shift in control from sellers to buyers – a fact that’s been evident in Zillow’s massive rally. Although the pattern actually broke out at the start of the month, a throwback in shares is providing another low-risk opportunity for buyers to take a position in this stock.
A throwback happens when a stock breaks out, only to come back and test newfound support at the breakout level -- $36 in Zillow’s case. While it may seem like a negative to see shares move lower after breaking out, it’s actually a positive because a successful bounce off of support reaffirms a stock’s ability to catch a bid at support.
Zillow bounced hard off of $36 yesterday, pushing 3.96% off of that level by the closing bell. Traders who want to go long would be wise to keep a protective stop just below $36.
Things aren’t looking quite so rosy for shareholders of fertilizer stock Mosaic (MOS). Potentially weak summer demand for Mosaic’s offerings is sending investors fleeing from this stock -- a flight that follows some important technical rules.
Shares of Mosaic had been consolidating in a range for most of 2012, bounded by support at $54 and resistance at $59. That well-defined sideways trading created an “if/then setup” in shares of MOS, a trading setup whose direction is wholly dependent on which way shares broke out of the channel == the break below $54 signaled a short position in MOS on its breakdown day.
Now shares are effectively in freefall. Even though shares have been trading lower for three sessions, with the nearest significant support level at $47, MOS could have a lot lower to move before it’s able to catch a bid.
If you decide to bet against MOS, I’d recommend placing a protective stop at the 50-day moving average.
Shares of the enterprise software firm have been trading sideways in an extremely tight channel since mid-March, bleeding off some overbought momentum after rallying more than 55% year-to-date. As with the setup in MOS, it’s crucial to wait for a break outside of that channel before taking a position in shares.
Resistance for CRM is currently at $158, and support is at $151. A breakout above the channel triggers a buy signal, whereas a breakout below it says that CRM is a short candidate.
Volatility has contracted significantly in this stock over the course of the last month. Because volatility is cyclical, it’s likely that CRM will see a spike in volatility when shares actually break outside of their channel. That could mean that a large move happens very quickly on the breakout from the If/Then channel.
Keep a close eye on this one.
Last up this week is telecom stock AT&T (T), a name that’s getting plenty of attention on the Twittersphere following a grab bag of company-related news hitting the headlines this week. AT&T is showing traders a little bit more directional bias right now than CRM -- negative bias, at that.
AT&T is currently forming a descending triangle pattern, with downtrending resistance and support at $30.50. In a descending triangle, shares bounce in between those two technically important levels, all the while getting squeezed closer and closer to a breakdown below support. When that breakdown happens, AT&T becomes a short candidate.
RSI had been bullish for AT&T for most of this year, but that changed in late March when RSI started on a downtrend, a bit of confirmatory evidence for the bearish setup in shares. That said, it’s crucial not to be early on a breakout trade like a descending triangle. Wait for support at $30.50 to get taken out before making a trade.
I also featured AT&T recently in "10 Dow Dogs That Are Barking for Gains."
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.