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5 Trading Setups to Ride This Rally - 13449 views
BALTIMORE (Stockpickr) -- What a rally! Stocks have climbed almost 6% since last Tuesday’s open, thanks in large part to the 3.4% push that bulls locked into the S&P 500 late in yesterday’s session. That makes the past five days’ gain the biggest since the March 2009 bottom.
But there are some definite differences between that massive rally and the one we’re seeing this week. For starters, while our recent rally has been big on a percentage basis, we still haven’t broken through any meaningful resistance levels -- for now, we’re still stuck in the same consolidation range that stocks have been in since the end of the summer.
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We’ll need to see a resistance level get taken out before Mr. Market starts yelling “BUY!” again. Right now, the most important resistance level to watch is 1225 in the S&P; it’s the top of the range that’s managed to constrict price action so well in the past few months.
Of course, you don’t necessarily need to wait for a breakout in the broad market to take advantage of the technical trading setups that are shaping up in a handful of individual stocks this week.
Remember, 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.
Here’s a look at five new technical setups that could deliver breakout gains to your portfolio this week.
First up this week is SanDisk (SNDK), the $11 billion flash memory maker. SanDisk has had a fairly rough run in 2011, sliding around 10% year-to-date as broad market weakness took the legs out of demand for shares. But that could be about to change, thanks to a bullish setup forming in shares right now.
SanDisk is currently forming an inverse head and shoulders setup, a formation that indicates exhaustion among sellers. In this pattern, the breakout level is the neckline – that’s the price above which traders should consider taking a long position in SNDK shares. Right now, this stock is sitting right at that neckline level, but a definitive breakout needed to justify actually taking this trade.
Defining your risk is one of the most crucial elements of any trade; in SanDisk’s case, you can do that by placing a protective stop just below the right shoulder (at the 50-day moving average).
Target (TGT) is another name that’s showing us a bullish setup right now. This stock has been locked in a wide uptrending channel since May, bouncing in between trend line support and resistance levels as shares climb higher. It’s worth noting that Target’s channel is really just a version of the consolidation channel in the broad market -- except it’s being tilted higher thanks to outsized relative strength in shares.
Relative strength (not to be confused with RSI) is a measure of a stock against its benchmark, in this case the S&P 500. You can see Target’s relative strength on the subgraph below its price chart. The fact that relative strength is rising is a bullish confirmation for shares’ ascent -- and it’s a statistically significant signal that shares should continue to outperform Mr. Market.
Right now, Target is near a test of its overhead trend line resistance level. A breakout above that “price ceiling” is a bullish signal for shares of this stock. If Target can make it above $53.50 this week, it makes sense to be a buyer of this stock. Otherwise, wait for the bounce back down to support before building a position in shares.
Oil and gas supermajor Exxon Mobil (XOM) had a solid day yesterday, rallying through its resistance level at $74 and satisfying the “if” in this stock’s “if/yhen trade.” Put simply, an if/then trade is a sideways consolidation setup that’s contingent on the price action in shares. If shares break above resistance, then go long. If they fall below support, then it becomes a short candidate.
Exxon’s breakout above $74 is a solid buy signal for shares -- but that doesn’t mean that it makes sense to buy this stock indiscriminately today. It looks like Exxon’s price is retracing a bit, at least early in today’s session; for that reason, we’ll want to wait for the next white bar day before going long XOM. A throwback to test newfound support at the $74 level is a plausible course of action in this stock, and it’s one that confirms the bullish breakout in shares.
On the next thrust higher off of $74, it makes sense to take a position. When that happens, longer-term traders should pace a protective stop under the strong $68 support level.
A very similar setup is taking place in shares of banking stock Wells Fargo (WFC). Wells Fargo made it through the financial crisis as the best-in-breed of the big banks. The stock’s recent price action proves that investors still hold the firm in high regard.
Right now, Wells is consolidating sideways, a major different from the slow death that most other banks have been staging in the last couple of months. The strong horizontal support and resistance levels in shares of Wells Fargo mean that this stock is presenting us with another if/then trade right now -- one that has yet to break out.
A bullish trend in Wells Fargo’s 14-day RSI indicates some upward bias to this setup; a buy signal comes on a sustained breakout above $26 -- yesterday’s “barely there” close along isn’t a sufficient trigger. With support at $23 looking particularly strong right now, I’d recommend that longer-term traders keep their protective stops just below that price level.
Last week, HP was near the bottom of its consolidation channel. As with Wells Fargo, bullish momentum in the stock’s 14-day RSI was a signal that this stock was showing some upside bias in shares; even so, the signal to buy was the breakout above $24 resistance. Traders make money when price action moves in their favor; unless that changes, price action is the only trading signal worth heeding.
When all was said and done, buying at that $24 breakout and holding through yesterday’s close would have netted gains of more than 7%. At this point, it looks like the upside target identified is still in play. That said, volatility remains high right now; the safer option is to take gains on the first sign of weakness in this stock.
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.