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5 Trades to Take After the "Obama Crash" - views
BALTIMORE (Stockpickr) -- I guess Mr. Market voted Romney.
Stocks got gut punched in yesterday's post-election market session, the Dow Jones Industrial Average and the S&P 500 both falling more than 2.3% to mark the worst single day for stocks of 2012. But that shouldn't have come as a huge surprise -- market selloffs are historically pretty common after presidential elections, especially when stocks are already out of favor with investors.
According to data compiled by Bespoke Investment Group, yesterday's selloff ranked the fifth-worst one-day reaction in the Dow to a presidential election. But looking at the data a little bit closer, and some interesting patterns emerge. For starters, each of the other four biggest post-election drops happened when a Democrat was voted in, and maybe more importantly, each time was followed up by stellar stock performance over that president's term.
In fact, buying the Dow after the drop day, and holding until Election Day four years later would have generated average annual gains of 15.04% -- more than twice what the Dow averaged over that time period. No matter who you voted for on Tuesday, that's a pretty good reason to feel better about stocks.
That's why we're taking a technical look at five big names that are tradable this week.
If 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, technical analysis is 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, I take an in-depth look at big names that are telling important technical stories. Here's this week's look at the charts of five high-volume stocks to trade for gains.
First up is $524 billion tech behemoth Apple (AAPL). This huge stock has been pulling back hard over the past couple of months, giving back 20% of its price as anxiety ramped up over whether the firm could justify a $700 (or even $600) price tag. But the selloff could be coming to an end -- here's what to look for.
Apple's trouble started up around the $660 level, when the stock triggered a head and shoulders top. Traders who shorted there had the chance to grab the lion's share of the move down. But even though Apple's drop has been big, it's only taken shares through one weak support level on the way down. That's important -- it means that the selloff has been "easy" rather than a meaningful exit from Apple spurred on by conviction selling. In other words, the stock has dropped because it moved through a range where there haven't been any buyers to begin with.
But there are buyers nearby. There are buyers right around the $558 level where shares closed yesterday, in fact -- it's a price that's acted as a floor for AAPL several times in the past, so it's a spot where Apple's drop could very well end when buyers start thinking that this Wall Street darling looks cheap again.
That said, I'd recommend very strongly against trying to catch the bottom in Apple; support levels do fail, and when they do, you don't want to be left holding the bag. Instead, wait for a bounce off of S1 -- the bounce lets us verify that those buyers are still hanging out at $558 before putting cash in the trade. We'll probably see that bounce today.
Ford Motor Co.
It's been the opposite situation lately at Ford Motor Co. (F) -- the Detroit automaker has been rallying hard since the end of July, most recently breaking out above an ascending triangle pattern to new 6-month highs. Even though Ford gave back 3% and change yesterday, there still a buying opportunity in this stock
Ford sported a runaway gap after breaking out of its triangle pattern, which meant that very few traders were able to jump onboard when the breakout happened. The throwback in shares is giving buyers a second chance at a low-risk entry.
Even though a throwback means that shares are sliding, it's a positive thing for shares of Ford because it gives the stock a chance to confirm newfound support above its $10.50 breakout level. I'd expect Ford to make a higher swing low off of yesterday's bottom -- aggressive traders should buy the bounce today, but I'd recommend risk-averse traders wait for Ford to prove it can catch a bid above Tuesday's close before jumping onboard.
Bank of America
A similar setup is shaping up in shares of Bank of America (BAC), it's just not as far long yet.
BofA is forming an ascending triangle, much like the one that Ford broke out of at the end of October. The pattern is formed by a horizontal resistance level and uptrending support -- basically, as shares of BAC bounce in between those two technical price levels, they're getting squeezed closer and closer to a breakout above resistance. For BAC, resistance comes in at $10 -- the breakout above that level is the buy signal for shares.
If you're a regular reader of this column, you know that talking about technical setups in real terms is crucial. After all, patterns like the ascending triangle don't work because of magic or geometry; it all comes down to supply and demand in the market. Resistance at $10 is a place where there's a glut of supply of shares. That's because it's a price where sellers have previously been more eager to sell and take gains than buyers were to keep buying. The breakout above $10 means that buyers have absorbed all of that excess supply at $10, and suddenly BAC doesn't have a barrier in the way of upside anymore. That's when you want to buy.
Intel (INTC) has been a mess lately. Shares are off more than 21% in the last three months, dragged lower by a struggling semiconductor industry that's coincided with a correction in the broad market. So, should you buy Intel here? Depends.
Intel has been consolidating sideways for the last couple of weeks in a price pattern called a rectangle. Consolidations are common, especially after a stock has made a large up or down move -- they indicate that investors are taking a breather to figure out their next moves in a stock. When shares break outside of the rectangle, we know whether buyers or sellers have won out.
In other words, you want to trade in the direction of a breakout in Intel. If shares are able to break out above the top of the rectangle at $22, then Intel is a buy. Otherwise, if shares fall through the bottom at $20.90, then this stock becomes a sell. Either way, I'd recommend keeping a tight stop on shares.
Last up is online auctioneer eBay Inc. (EBAY). Even though selling pressure has plagued the tech sector of late, eBay has been able to buck the trend, instead rallying more than 23% since the middle of the summer on strong earnings. But that doesn't mean that you've missed the trend -- EBAY is pointing to higher ground this week.
That's because EBAY is currently forming an inverse head and shoulders setup at the top of its uptrend. The inverse head and shoulders is a bullish setup that's formed by two swing lows at the same level (called the shoulders, by themselves they're a lot like a double bottom) that are separated by a deeper low called the head. The pattern indicates exhaustion among sellers -- and judging from the rally that EBAY has staged in the last quarter, sellers must be pretty exhausted indeed right now. While seeing this pattern at the top of an uptrend isn't textbook (it's typically a reversal pattern), the trading implications are the same: the buy signal comes when shares push through the $51 neckline.
And just in case you think that the head and shoulders is too well known to be worth trading, the research suggests otherwise: a recent academic study conducted by the Reserve Board of New York found that the results of 10,000 computer-simulated head-and-shoulders trades resulted in "profits [that] would have been both statistically and economically significant."
That's reason to pay attention to EBAY this week.
To see this week's trades in action, check out the Technical Setups for the Week portfolio on Stockpickr.
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.