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5 Trades to Profit From the Selloff - 15504 views
BALTIMORE (Stockpickr) -- Operation Twist is having the unintended consequence of wringing any bullish sentiment out of the market this morning -- not exactly what the Fed had hoped for when it announced its plan yesterday afternoon.
Simply put, investors were expecting a big action from the Fed to help the economy. Instead, what we got was Operation Twist, a half-measure that was both completely expected and thought to be marginally effective at best (even if it’s providing a perfect trade in an ETF I talked about on Tuesday). The biggest shock from the Fed might just be their lack of any shock at all.
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It’s not exactly surprising that stocks are selling off this morning. Market participants expected the Fed to kick the door down with guns blazing; instead, they just kicked the door down and ran off. From a technical standpoint, timing could have been better too.
Right now, the S&P 500 is a hair’s breadth away from testing trend line support off of Aug. 8 lows; a breakdown below that support level will be a seriously bearish signal for investors. Barring the Fed’s actions yesterday, I’d have said that a bounce off of support was the high-probability scenario in the S&P 500. Now I’m not so sure.
Even so, a number of technical trading setups are taking place in some of Wall Street’s biggest-name stocks. Even if the floor falls out of the market, these names could show us some gain potential. In case you’re new to technical analysis, here’s the executive summary:
Technicals are a study of the market itself. Since the market is ultimately the only mechanism that determines a stock's price, technicals are a valuable tool even in the roughest of trading conditions. Technical charts are used every day by proprietary trading floors, Wall Street's biggest financial firms, and individual investors to get an edge on the market. And research shows that skilled technical traders can bank gains as much as 90% of the time.
Every week, we take an in-depth look at large-cap stocks that are telling important technical stories. Here’s this week’s look at the technicals of five must-see stocks.
Let’s switch gears to a considerably more optimistic name: Wall Street darling Apple (AAPL). Apple has show tremendous relative strength this year, rallying nearly 30% as the S&P 500 slid more than 7%. That outperformance has been built on phenomenal fundamentals (remember, Apple’s real P/E ratio is only 11.8). The technicals are equally attractive.
Apple has been forming a bullish ascending triangle in the last few months, a setup that had resistance at $400. At the start of this month, I recommended buying Apple at $383 in anticipation of a $400 breakout, and that’s exactly what happened on Monday. Now a throwback in shares could provide a second low-risk entry for traders who missed the first rally.
A throwback happens when shares of a stock break out above resistance, then return to that former resistance level to test newfound support. With broad market weakness likely to drag Apple lower in today’s session, buyers should look to buy as close to $400 as they can. Shorter-term traders can place a protective stop just below the uptrending support line in the chart above.
Lloyds Banking Group
A similar setup is forming in shares of UK-based insurance firm Lloyds Banking Group (LYG). Like Apple, Lloyds is forming a bullish ascending triangle right now, with horizontal resistance around the $2.25 level and uptrending support acting as a sort of price floor for shares. Unlike Apple, this ascending triangle is forming at the bottom of what’s been a major descent.
Still, the potential for a reversal makes this trade worth watching in this market.
Lloyds is getting smacked lower early in this morning’s trading, the result of the colossal selloff that took place in European markets overnight. Still, shares are holding that support level for now, and the pattern remains valid as a result.
The buy trigger on Lloyds comes on that breakout above $2.25. Momentum, as measured by a 14-day RSI, is confirming a bullish move in LYG. That said, I wouldn’t recommend trying to anticipate the breakout in this stock; the high-probability trade doesn’t happen until the breakout happens.
Llyods shows up on a recent list of 12 Banks Slashing Jobs
The exact opposite setup is taking place in shares of Alcatel-Lucent (ALU), the American Depositary Receipt of the Paris-based communications firm. Not surprisingly, ALU is getting sold off hard this morning as the Euro Stoxx 50 Index sits on 4.4% losses this morning. In this case, the move is providing a short-side trigger in ALU.
Alcatel-Lucent is forming a bearish descending triangle right now. This formation is identified by horizontal support and downtrending resistance -- a combination that indicates bearish directional bias among this stock’s market participants. Our support level is currently $3. That level is being testing this morning.
A confirmed breakdown below $3 is the signal to pull the trigger on a short of ALU. Traders looking for a leveraged way to trade the breakdown might want to consider some of ALU’s December in-the-money puts -- they’re looking like a good bargain right now. If nothing else, a triggered ALU trade will provide a decent hedge for investors who are net long. Of course, it’s critical to wait for the breakdown to get confirmed before selling short or buying puts on this name.
Consider a protective stop just above the upper resistance line at $3.40.
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Meanwhile, $96 billion food giant PepsiCo (PEP) is forming a solid if/then trade. An if/then trade is another name for a sideways consolidation -- it’s a trade whose direction is contingent on which way shares break out of the channel. For Pepsi, resistance is currently $64.75, and support is at $60. That’s a relatively wide channel, but its breakout implications are equally big as a result.
An if/then trade works like this: If shares of Pepsi break out above $64.75 resistance, then buy shares. If shares of Pepsi break down below $60, then this stock is a short candidate. Don’t be fooled by the fact that shares are consolidating near the lower end of their range right now. Pepsi’s positioning within the channel doesn’t matter; it’s Pepsi’s exit from the channel that’s technically significant.
Either way this trade ultimately works out, I’d recommend placing a protective stop back just within the channel.
Last up this week is a recap from last week’s column: Dish Network (DISH). Last week, shares were pushing through a breakout level, and I suggested, “taking a long position in shares for a short-term trade,” as shares worked their way to the $28 resistance level set back in June -- the nearest price target in shares.
Sure enough, the trade was textbook. Shares moved from that breakout level to the $28 price target, and hit their head on resistance there. Traders who put a stop just below that $28 level would have raked in 7% gains on the trade in the last week. If you’re still holding onto shares for some reason, it’s certainly time to get out.
To see this week’s potential trades in action, check out the High Volume Technicals 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.