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5 Trades to Find Gains in the Eurozone - views
BALTIMORE (Stockpickr) -- The eurozone is continuing to dominate the news cycle this week, most recently after Standard & Poor’s put 15 European nations on review for a debt downgrade yesterday.
If S&P does go through with a downgrade, the decision would apply to $8.1 trillion of government debt. Meanwhile, stocks -- both here at home and in Europe -- have been taking advantage of a prodigious rally for the last week and change, as investors shrug off the latest debt concerns.
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Volatility is still a big factor in the market right now. The question is how best to take advantage of it now that it’s bouncing stocks higher instead of holding them underwater. To answer that question this week, let’s take a look at five promising technical setups in eurozone-domiciled stocks. These names have considerable exposure to the euro as well as exposure to economies across the pond.
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.
Without further ado, here’s a look at five eurozone technical setups that could deliver breakout gains to your portfolio this week.
It’s been a challenging year for French oil servicer CGG Veritas (CGV) -- shares of the firm have slid more than 21% since the start of 2011. But shareholders’ fortunes may be soon to change thanks to a bottoming formation that’s currently shaping up in shares.
Right now, CGV is forming an inverse head-and-shoulders setup, a bullish pattern that indicates exhaustion among sellers. Don’t focus on the somewhat bizarre look of this setup; while it’s not a textbook example, the trading implications are what matters. Right now, CGV has a neckline level at $26 -- that’s the price that’s acting as a breakout level for traders.
Even though the head-and-shoulders (both inverse and regular) pattern may be one of the most well known technical patterns out there, don’t think that it’s lost its usefulness as a trading indicator. A recent academic study conducted by the Federal Reserve Board of New York suggests that the results of 10,000 computer-simulated head-and-shoulders trades resulted in “profits [that] would have been both statistically and economically significant.”
It’s important not to be early on this setup. CGV isn’t a high probability trade until shares push above $26.
Zurich, Switzerland-based ABB (ABB), one of TheStreet Ratings' top-rated scientific instrument stocks, is a power and automation firm that generates around half of its sales in the eurozone. Like CGG Veritas, ABB shareholders have had a challenging year in 2011, watching their positions slide more than 16% year-to-date. But again, a bottoming pattern may provide an upside trade in the near-term.
ABB is forming a double-bottom setup, a pattern that’s identified by two swing bottoms that take place at approximately the same level. Each bottom is separated by an intermediate peak that’s in between them -- that peak is the breakout level that tells traders when the reversal pattern is complete. In the case of ABB, that peak is at $20.
It’s important to remember that, as with all technical patterns, a double-bottom isn’t a definitive until shares break out above that $20 resistance level. Another bounce off of $20 would morph the setup into a different pattern, even if the trading implications of a breakout above that $20 level remain the same later on. When the breakout does happen, I’d recommend keeping a protective stop right at the 50-day moving average.
ARM Holdings (ARMH) is a UK-based semiconductor firm that has considerable exposure to the eurozone. This stock has been locked in a wide range for much of the year, bouncing between a staunch resistance level at $31 and a number of support levels below it. The definition of that $31 resistance level should have traders’ attention as we tick closer to 2012.
Essentially, strong resistance levels form when there’s a glut of supply for shares at a specific price level. As shares approach that $31 level, that supply completely absorbs buyers’ demand, and share prices reverse lower. But if buyers can build enough strength to push shares above $31, that provides a strong signal for a high probability trade in ARM.
The most important element of this trade is the breakout. Until it happens, we’ll have to assume that there’s still a major pocket of supply at $31. The push above that level means that we’ll be without any upside stumbling blocks for a rally.
Of all of the eurozone stocks we’re looking at this week, Diageo is the one that’s been showing investors the best relative strength in the last few months. Since the original Aug. 8 bottom in the broad market, Diageo has rallied more than 8.2% -- more than twice the performance of the S&P 500 over that same period. Now, this stock is testing a strong resistance level at $86.
As with ARM, resistance is much better defined in this stock than support is. While that sounds like an ostensibly bearish characteristic, it isn’t. Remember, we’re looking for breakouts here, so a push through a strong resistance level has much more technical significance than an easier move through mushy resistance.
When DEO makes its way above $86, we’ll have a clear signal that buyers have taken control of this stock.
Last up this week is Yandex (YNDX), the Russian search giant that’s domiciled in the Netherlands. Yandex one of the firms that took advantage of the mini tech IPO boom earlier this year, trading on the Nasdaq for the first time earlier this summer. Since then, though, shares have been locked in a bearish downtrending channel -- at this point, it looks like there’s additional downside in shares.
Yandex is down around 45% since it first started trading, but the size of YNDX’s drawdown isn’t as significant as the symmetry of its channel. Trend line resistance and support are well defined for this setup, and that provides short-biased traders with a predictable entry point to bet against shares. Put simply, the ideal time to take a short position is just after a bounce off of trend line resistance (the red box), just as shares start to move down to trend line support.
Waiting for a bounce is important on a channel trade. Trend lines do invariably fail, and when they do, traders who got in early are left holding the bag. By waiting for the bounce, you’re making sure that resistance is still in play before taking a short position. If you do take this trade, I’d suggest putting a protective stop just above the resistance line.
Yandex is the top holding Tiger Global Management's portfolio, comprising 22.9% of the total portfolio with a 54.1 million-share stake as of the most recently reported quarter.
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.