A major bullish shift in the markets yesterday was spurred by -- you guessed it -- good economic data. The S&P 500 index climbed 2.95% in Wednesday’s trading following news that August ISM manufacturing data blew expectations out of the water.
That relief rally comes at a key time. With stocks approaching June lows, many traders wondered if we were going to reach new 2010 lows later this fall. While we’re not out of the woods yet, yesterday’s price action should do a good job of reminding traders of the bullish element on Wall Street.
Some of yesterday’s biggest moves were seen by resource stocks, which enjoyed higher-than-normal volume at the hands of the market’s big price action. Resource stocks have been thought of as safe haven investments of late. With prices tied to commodity values to some extent, investors have turned to miners, drillers and growers in order to skirt the market’s machinations.
So where are the world’s biggest resource plays headed? Let’s take a technical look.
Technical analysis uses a stock's price movements to determine where shares are headed in the future. Technical charts are used daily by proprietary trading floors, the Street's biggest financial firms and individual investors to get an edge on the market. And according to some sources, skilled technical traders can bank gains as much as 90% of the time.
Here's this week's look at how some of the biggest names on Wall Street are trading technically.
>>Also see: Breakout Stocks: Eldorado Gold, Riverbed Tech
Big moves were certainly on the menu yesterday for Australian miner BHP Billiton (BHP). The company rose 5.47% intraday on what essentially amounted to no material news. What caused such a big jump in such a big stock? Its technical setup had more than a little to do with it.
Shares of BHP had been converging on resistance at the 50-day moving average, a level that had already held up as a price ceiling back in early August. But the market’s bullish push helped give BHP the momentum it needed to break above the 50-day. After that, there was little upside pressure to hold shares down. More of the same could be in store.
Right now, BHP’s nearest resistance level is the 200-day moving average (the thin red line), but that level shouldn’t pose too much of a problem for investors assuming that any semblance of bullish pressure can keep up. After that, a near-term high of $76 poses a surer challenge. If you’re considering betting on BHP, place a tight stop at around $68 and beware of a loss of momentum at $72.25.
2010 has been a year of strong performance for gold stocks, chief among them $44.7 billion Barrick Gold Corporation (ABX). Shares of the gold miner have risen 15.11% already year-to-date, outpacing the loss-eating S&P 500 by a significant clip. But that changed yesterday when Barrick lagged the S&P in a big way. Shares fell 3.06% as investors became bullish on equities once again and converted their assets from gold stocks.
Things had been looking good for Barrick over the course of the last week. The company had broken above resistance to new highs, giving investors hope that this mining stock could see an even higher breakout in shares. But yesterday’s capital flight away from gold pushed shares down in an unsurprising move back below resistance.
That doesn’t mean that Barrick won’t provide investors with upside potential in September -- only that it’ll be significantly more difficult to regain the bullish momentum that this stock had before yesterday. I’d recommend staying away from the long side of this stock unless it can close above the $46.50 level for two consecutive closes. Otherwise, consider playing the big-time downside risk by betting against shares in the short-term.
>>More on Barrick: 30 Stocks That Matter Most to Hedge Funds
It’s hard to talk about resource stocks without bringing up oil giant Exxon Mobil (XOM). This $310 billion supermajor owns some of the best-performing properties in the business -- with one of the most attractive cost structures to boot. From a technical perspective, now could be an especially appealing time to pick up shares.
Right now, it looks like Exxon could be in the process of forming an inverse head-and-shoulders pattern -- a strong signal that a major bullish move is forthcoming. That said, the head-and-shoulders is an overly-relied-upon pattern among traders; it’s popular because it’s easily identifiable and novice traders can understand it, but quite frankly, it’s one of the least-reliable technical setups in the trader’s toolbox.
That said, Exxon’s pattern could prove to be an interesting one -- especially because the stock broke above the only resistance level between share prices and the trade trigger yesterday. For this H&S pattern to be tradable, we’ll want to see shares push above the Shoulder Level line, then double back and confirm support at that line. Don’t even think about trying to take this trade before it pushes above shoulder level.
>>More on Exxon: 5 Oil Stocks Set to Come Back
To see this week’s trades in action, check out the High Volume Technicals portfolio on Stockpickr.
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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.
