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5 Trades to Profit From a January Rally - views
BALTIMORE (Stockpickr) -- 2013 is starting off on the right foot, as stocks climb higher early in the first trading day of the new year. A lot of that buying pressure is coming from a fiscal cliff resolution that couldn’t have come any sooner. In this case, the substance of the legislation matters a whole lot less than the fact that it got passed.
But for investors, there is at least some substance to pay attention to: Taxes on capital gains and dividends will remain at a discount for all taxpayers (while higher earners pay a higher rate). Of course, this isn’t the last we’ll hear from Capitol Hill. The debt ceiling remains unchanged by the fiscal cliff bill, which means that the politicking will rear its ugly head again -- and probably derail the stock market -- in a month or two.
In the meantime, this year’s early trading is reason enough to break the noisemakers from Monday night back out. With evidence pointing to a significant rally at the start of this year, there’s reason to think about buying stocks again.
That’s why we’re taking a technical look at five trades that could help you profit from a January rally in stocks.
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.
So, without further ado, let's take a look at five technical setups worth trading now.
With countless folks around the world getting ready to set off on their New Year’s resolutions, Weight Watchers (WTW) stands to benefit in a big way -- but that’s not why we’re looking at shares of this stock today.
It’s been a pretty tepid year for WTW. In spite of an early 2012 jump, the last 12 months ended with shares of this weight loss stock down around 5%. But the chart points to a change in trend.
That’s because WTW is currently forming an ascending triangle pattern. The ascending triangle is a price pattern that’s formed by a horizontal resistance level to the upside and uptrending support below shares. Essentially, as WTW bounces in between those two technical levels, it’s getting squeezed closer and closer to a breakout above resistance at $57.50. When that breakout happens, investors have a “buy” signal for shares.
Snap-On (SNA) is showing traders an identical pattern right now, albeit with a more textbook context. Like Weight Watchers, Snap-On has been bouncing within a triangle pattern, hitting its head on resistance at $80 to the upside and an uptrending support level that’s effectively come in at the 50-day moving average. The breakout above $80 is our buy signal for this stock.
Whenever you’re looking at a technical price pattern like this one, it’s critical to think in terms of buyers and sellers. After all, while the “triangle” pattern is a good way to describe what’s going on in SNA, geometry has nothing to do with this stock’s upside potential. Instead, it all comes down to supply and demand for shares.
Here in SNA, $80 is a price where there’s an excess of supply of shares; in other words, it’s a place where sellers have been more eager to take gains and sell their shares than buyers have been to buy. That’s what makes the breakout above $80 so significant -- it indicates that buyers have become eager enough to absorb all of the excess supply above that price level.
Then, with the only upside barrier taken out, buying SNA becomes a high probability trade. Since the 50-day moving average has acted as such a good proxy for support over the course of this pattern, it’s a good spot to place a protective stop after you buy the breakout.
2012 was a strong year for shares of mid-cap jewelry chain Signet Jewelers (SIG). Shares of the company have rallied around 21.5% in the last 12 months, and now they look primed to go even higher thanks to a trend channel that’s constricting this stock.
Signet started in a trend channel at the start of July, bouncing in between trendline resistance to the upside and trendline support acting as a floor below shares. In total, SIG has managed to bounce off of support no less than seven times since the middle of the summer -- an impressive track record that indicates that there’s significant demand for shares right at that uptrend line. Now, with SIG sitting right above support, we’ve got a good buying opportunity for shares.
When you’re looking to buy a stock that’s in an uptrending channel, the ideal entry point comes on a bounce off of support. That’s because it the spot where your potential reward (the distance from the stock’s current price to trendline resistance) is the highest, and risk (the distance from the stock’s current price to trendline support) is the lowest.
If shares break support, then the channel is broken and it’s time to exit. I’d recommend keeping a protective stop just below that price level.
Visa (V) is forming the exact same setup right now. Shares of the world’s biggest payment card network have found themselves locked in an uptrending channel since the beginning of June, climbing higher on each bounce off of trend line support. With shares coming off of support right now, buyers have a good chance to jump on shares.
In a trend channel, it’s important to wait for a bounce before buying. It may sound strange to wait for shares to move higher before you buy, but missing out on a little upside is worth the knowledge you glean from the bounce. All trend lines eventually fail, and when they do, you don’t want to be the one holding the bag. By waiting for the bounce first, you can verify that Visa is still able to catch a bid at support before you put your money on the line.
The 50-day moving average has done a good job of mirroring trend line support for the past few months, so I’d recommend using it as your protective stop.
Last up today is VMWare (VMW), a stock that’s been getting ready for a reversal. Even though VMWare posted decent returns in 2012, the stock has been trending lower since early April. But a double bottom pattern in shares suggests that this stock could be about to make more upside progress in 2013.
A double bottom is a price pattern that’s formed by two swing lows that bottom out at approximately the same price level. The two bottoms are separated by a peak that marks that resistance level for the setup. A breakout above that price (right around $100 for VMW) is the buy signal for shares.
$102.50 is actually the top of the peak for this stock, but the lower price means more for this trade. The fact that VMW’s resistance comes in at $100 is significant: big psychological price barriers like $100 can often act as stumbling blocks for buyers, so if VMW can overcome resistance there, buyers have a doubly strong signal.
Momentum adds some extra confidence to this trade -- 14-day RSI has been trending higher since the second bottom started forming. If you decide to be a buyer when the $100 breakout happens, it makes sense to keep a protective stop just under the bottom of the price pattern.
To see this week’s trades 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, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.