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5 Tradable Technical Setups for April - 45676 views
BALTIMORE (Stockpickr) -- April’s starting fairly calm right out of the gate. The first two days of the new month have delivered 0.53% returns in the S&P 500, calm and collected by most traders’ standards. But in the context of the market’s price action from March, that cautiously optimistic start to April begins to look pretty good.
That’s because of the massive price swing that took place in March, first selling the S&P off to support at 1250, then bouncing the index back above the key 1300 level. As the market builds a base back at higher price levels, a stronger bull case for April starts making sense. All the more reason to turn to attractive technical setups to start the month.
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.
Fortune Brands (FO) is one of the most interesting stocks on the NYSE today. With a hand in everything from liquor to home security to golf, this firm’s operations are nothing if not diversified.
Of course, that’s been part of the problem for Fortune. With fragmented business lines, the company is selling off its mismatched assets to reign in its unwieldy profile. The resultant influx of cash could be a big catalyst for a higher move, but shorter-term, the technicals speak to an attractive if/then setup in shares.
Essentially, Fortune has been consolidating sideways since December, trading in a tight range between $60 and $62. While that range has been frustrating for shareholders hoping for a move higher, it’s presenting a well-defined risk-reward setup for traders right now.
In consolidation channels, the trigger comes on a break above or below the channel. Simply put, if shares fall below support, it’s time to go short. If they break above resistance, bearish barriers have succumbed to buying, and it’s time to go long.
Right now, this stock’s bias is clearly to the upside. If shares can manage a sustained crack of the $60 level, it’s time to be a buyer.
A similar setup is playing out in shares of another luxury manufacturer right now: Coach (COH). Coach’s consolidation is a bit different in that it’s a much larger range. With shares trading in a consolidation channel between $50 and $58, the implication is that a breakout to the upside will result in a much larger move than Fortune’s. That’s enough to turn some eyes to this stock right now.
That said, with shares of Coach still toward the bottom of the channel, the luxury leather goods maker has a way to go before an upside breakout is likely. But with the market’s current posturing, a bullish play on Coach makes the most sense right now. Either way you play it, after shares break out, keep a protective stop just inside the channel.
Meanwhile, 2011 has been a bull market for shares of EMC (EMC). The enterprise computer storage firm has witnessed a number of industry wide shakeups and acquisitions this year, pushing the stock to 13.6% year-to-date gains as investors sought exposure to the computer storage business. That buying may have been especially fortuitous given EMC’s bullish setup right now.
That’s because shares of EMC are forming an ascending triangle pattern right now, a bullish setup that’s characterized by a horizontal resistance level overhead and uptrending support below. As shares get squeezed closer and closer to that resistance level, the glut of supply at resistance gets absorbed by buyers, and the chance for an upside breakout can become a reality.
In EMC’s case, that resistance level is at $27.50. If and when the breakout does happen, put a protective stop just below trend line support at $26 to protect against a fakeout that returns shares to the price pattern.
As of the most-recently-reported period, EMC comprises 3.9% of the portfolio at Julian Robertson's Tiger Management, and Whitney Tilson's T2 Partners increased its position in the stock by 21% during the period.
A similarly bullish setup is showing up in shares of Liberty Media (LCAPA) right now. The $54 billion media holding company is a major player in the media, entertainment, and retail industries -- but the stock’s uptrending channel is a purely technical reason to go long at $74.
Liberty’s shares have been trending higher since September, but what’s crucial is the fact that they’ve been bounded by dynamic areas of support and resistance. As with the consolidation channels in Coach and Fortune Brands, those support and resistance levels provide a good definition of risk-reward. Unlike the horizontal consolidation channels, however, the upward trend of Liberty’s channel provides a way to trade the stock as it bounces inside the channel.
Shares of Liberty are sitting right at trend line support right now; I’d suggest going long on the stock’s next bounce higher.
As of the most-recently-reported period, Liberty Media is one of the top holdings of Chase Coleman's Tiger Global Management.
John Wiley & Sons
While a similar-looking setup is forming in shares of John Wiley & Sons (JW.A), there’s a key difference that makes Wiley a bearish case. It’s the fact that Wiley’s trend lines are converging -- that factor alone shifts the stock’s setup from a channel up to a bearish rising wedge.
The rising wedge is an early signal of exhaustion in an uptrend (and an incredibly reliable one; rising wedges ultimately result in downside breakouts nearly 90% of the time). You don’t want to play this setup within the trend lines. Instead, wait for shares to break below trend line support before betting against shares of Wiley.
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.