That’s why it’s critical to wait for the breakout before becoming a buyer.
Momentum, measured by the 14-day RSI, adds some extra evidence for this setup. The downtrend in support broke in early June, and momentum has been trending higher ever since. Because momentum is a leading indicator of price, that's a very good thing.
Honda Motor is forming a more textbook pattern right now. The automaker is currently forming a double bottom pattern, a setup that’s formed by two swing lows that bottom at approximately the same level. The “buy” signal comes of a push above the peak that separates those two lows; in Honda’s case that breakout level is $35.
Like COF, Honda is getting some extra evidence for its upside from momentum. The downtrend in RSI broke when the stock made its first bottom, and has since switched into an uptrend. That’s a solid signal right now.
One thing you may notice about Honda’s chart is that it looks different from the other charts we’re looking at — it’s full of price gaps. Those gaps, called suspension gaps, are just the result of Honda trading on the Tokyo Stock Exchange when U.S. markets are closed. They can be ignored for technical analysis purposes.
Residential REIT AvalonBay Communities has been staging an orderly climb in 2012, bouncing in between two parallel trend lines called a channel. That orderly ascent is important — it provides traders with high probability levels for AVB to hit. As a result, we’ve got another upside trade in this stock.
The uptrending channel in AvalonBay has been intact since before the start of the year, and shares have been obedient: The stock has bounced off of a trend line nine times over the course of 2012, a number that adds confidence to the strength of the channel. In an uptrending channel, the optimal time to buy comes on a bounce off of support.
There are two reasons for that. First, it’s the lowest point in the channel (and thus has the farthest to go before it hits resistance), and second, it’s got the lowest risk because you’ll know instantly if you're wrong (a breakdown below support means that the channel is no longer valid, after all).
With AVB bouncing off of trendline support right now, it makes sense to be a buyer here.
Last up today is telecommunications giant AT&T, a stock that’s forming the same uptrending channel as AvalonBay Communities. While AT&T’s channel isn’t as well tested as AvalonBay Communities’ was (it only has bounced five times, versus nine for AvalonBay), it’s still a tradable pattern.
Right now, AT&T is testing trend line support, providing investors with an optimal entry opportunity. But it’s critical to wait for the bounce in AT&T before being a buyer. That’s because, ultimately, support levels do fail, and when they do you don’t want to be left holding the bag. Waiting for a bounce may cost you a couple of points, but it’ll indicate that AT&T can still catch a bid at support.
If you decide to take the AT&T trade, I’d recommend placing a protective stop just below the 50-day moving average.
—By TheStreet.com Contributor Jonas Elmerraji
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At the time of publication, Jonas Elmerraji had no positions in stocks mentioned.