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BALTIMORE (Stockpickr) -- Another flat morning for stocks is a good sign for the market, as investors digest the gains of the last few weeks. Stocks (as measured by the S&P 500) have climbed nearly 5% since mid-March, a jump that brought the market back to modest gains for 2011. At present, the S&P is up more than 6% year-to-date; the Dow Jones Industrial Average is up more, with 7.33% gains this calendar year.
That divergence between the S&P and the Dow shouldn’t be overlooked. While the S&P 500’s tracking of the 500 largest stocks on Wall Street acts a good proxy for the broad market, the Dow’s 30-position portfolio acts as an even better barometer for the blue-chip stock space. With blue chips bringing on the bulls right now, it makes sense to take a technical look at the highest volume names on Wall Street this week.
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Technical charts are used every day 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.
Every week, we take an in-depth look at three large-cap stocks that are telling important technical stories right now. Here’s a glimpse at this week’s stocks.
Shares of telecom giant AT&T (T) have been on fire following the announcement that the company was pursuing an acquisition of T-Mobile USA. The purchase would make AT&T the largest mobile carrier in the U.S. -- and dramatically change the investment landscape of the industry. Right now, the technicals suggest that shareholders will get to hold onto those gains.
The sizable rally in AT&T spiked the firm’s shares around 10% in two weeks, but that sort of vertical movement was clearly unsustainable for more than a week or so. Often, vertical price actions in stocks are met with nearly vertical retracements as investors try to get a handle on what shares should really be worth. But the best-case scenario is taking place in shares of AT&T right now.
That’s because the carrier is seeing sideways consolidation right now, as shares bleed off overbought momentum and build a base of transactions to support another move higher. This could be a good time to go long AT&T -- just be aware of the added fundamental risks that could come from the acquisition news. If you do accumulate shares here, consider a protective stop just below $30.
Top competitor Verizon (VZ) is seeing a similar technical outlook right now. Not surprisingly, all of those extra eyes on AT&T spurred buying in Verizon as investors took stock of the haughty competition in the industry.
While the upward spike in shares wasn’t nearly as impressive as that of AT&T, it’s still an auspicious start to April.
Most important, the move in Verizon brought shares above previous resistance of $37 -- a level that the stock had previously found a ceiling at. A downward angle to Verizon’s consolidation channel makes this stock a much less attractive buy at this point. Instead, wait for a break above $38.50.
Verizon is another of Berkowitz's new buys in the most recently reported period, and it's also a top holding in George Soros' portfolio. With an A- buy rating, it's one of TheStreet Ratings' top-rated telecommunications stocks.
Bank of America
Bank of America (BAC) has been having a relatively rough go of it in 2011. Shares have been generally in decline for the year, and the bank’s most recent dividend increase request to the Fed was publicly rebuffed. But things are starting to look up for shareholders as this stock builds a base.
Particularly appealing is the normally bearish setup that’s forming in shares. Don’t follow? Right now, Bank of America is showing a descending triangle pattern, a technical formation that’s normally thought of as a bearish setup -- but from a statistical standpoint, it’s a pattern that actually has very little predictive power until an actual breakout has occurred. With positive sentiment flowing through to stocks right now, I think that a break higher is the most likely scenario for BAC in April.
The buy signal comes in on the stock’s break above $14 resistance. When and if that happens, I’d suggest planning an exit around previous support at $15, and a protective stop below support at $13.25. Remember, the stats tell us that this pattern has little in the way of predictive ability -- that means don’t go long until the breakout occurs.
Bank of America, one of David Tepper's nine favorite Dow stocks in the most recently reported quarter, appears in a recent list of 10 Banks With the Biggest Fee Worries as well as 40 Stocks Analysts Are Insanely Bullish About.
Part of the argument for upside in BAC comes from more decisively bullish setups across the banking industry. Take Wells Fargo (WFC), for instance.
Wells pulled back in mid-February, along with the rest of the industry. Since then, though, shares have been in a modest uptrend as they approached light resistance at the 50-day moving average.
A break above the 50-day would be a buy signal for Wells Fargo, but not a particularly large one -- resistance at $34 is still tough. Nevertheless, it could be the next step toward a larger scale upward move in this stock.
Wells Fargo, another top holding of David Tepper's Appaloosa Management also shows up in the portfolios of John Paulson's Paulson & Co. and Warren Buffett. It was highlighted in a recent list of 5 Banks With Looming Layoffs and is one of TheStreet Ratings' top-rated diversified financial services stocks.
Mitsubishi UFJ Financial Group
Not all banks are showing ostensibly bullish setups right now. Shares of Japanese banking holding company Mitsubishi UFJ Financial Group (MTU) broke below $4.50 support in yesterday’s trading. That makes this week’s close all the more crucial: Shares are pulling back to around that $4.50 level in today’s trading; if they can’t manage to close above $4.50, expect short sellers to move into this stock.
That said, if you’re looking for shorting opportunities, I’d strongly recommend not shorting shares until the stock manages either a bounce down from the broken support line, or a lower close than today’s. Keep your protective stop above the line.
Mitsubishi UFJ shows up on a recent list of 10 Japan Stocks With Upside.
To see this week’s 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.