I’d imagine this is getting old for Bernanke at this point.
All eyes are on Ben Bernanke this week, as investors wait intently for the Federal Reserve (learn more) chairman's press conference in Wyoming tomorrow. Once again, QE3 (learn more) is the topic of interest. Investors want to know if the Fed will be pumping liquidity into the market with another round of so-called quantitative easing.
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The QE3 talk is practically comical at this point; it’s like investors are a bunch of QE junkies just waiting for their fix. The fact of the matter is that, much like heroin, easing may provide a short-term high, but long-term it's a disruptive, toxic move.
A few months ago, the last time the QE3 rhetoric started popping up, I said why I didn’t think that QE3 was coming for investors: The data just didn’t support another round of Fed intervention. It still doesn’t.
And even if it did, why would Bernanke want to pump liquidity into the markets now anyway? Stocks have been experiencing a double-digit rally for the last few months at the same time that unemployment’s (learn more) been falling and housing has been recovering. I’ll be the first to admit that I can’t predict what Ben’s going to say tomorrow, but how much sense does it make to whip out your last box of ammo when things could be a lot worse?
That’s why we’re ignoring the investor anxiety ahead of the meeting and taking a technical look at five new setups set to slingshot higher in this market.
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 percent of the time.?
Every week, we take an in-depth look at big names that are telling important technical stories. Here’s this week’s look at the technicals of five high-volume stocks ready to move higher.
It’s been a strong year so far for Microsoft shareholders. Since the first trading session of 2012, shares of the technology giant have rallied more than 18 percent, outpacing the broad market’s already impressive performance by half.
As we approach the end of summer, Microsoft’s performance could be about to accelerate.
Microsoft is forming an ascending triangle pattern, a setup that’s formed by horizontal resistance (in this case right at the $31 level) to the upside and uptrending support below. As shares bounce in between those two technically important price levels, they’re getting squeezed closer and closer to a breakout above that $31 resistance level. When that happens, we’ve got our “buy” signal.
Volume has been slowly declining over the course of the pattern, and that’s a good thing. We’ll want to see a volume spike when the breakout above $31 happens. That indicates that buyers are participating in the breakout.
Capital One Financial
A similar setup is forming in shares of Capital One Financial. While the pattern in Capital One is far from a textbook ascending triangle, it’s a good example of why a trading pattern is less important than the factors that cause that pattern.
In other words, we’ve got a long-term horizontal resistance level at $58 and uptrending support below Capital One’s current price — so that is a very tradable setup. As with Microsoft, the “buy” signal comes on a push above resistance.
It’s useful to talk about what's going on in Capital One in real terms. That resistance level at $58 is a price above which there’s a glut of supply (think selling pressure) for shares of this stock. That’s why buyers’ attempts at pushing shares higher have been rebuffed every time they’ve hit that level; increasingly ambitious sellers want to take gains, and they have been absorbing any buying pressure at $58.
But the uptrending support indicates that buyers do have some control of shares right now. The breakout above $58 means that the glut of supply of shares got absorbed by buyers and that barrier to upside in Capital One is gone.
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
Additional News: Microsoft Unveils New Look
Additional Views: Traders Weigh In on Microsoft
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At the time of publication, Jonas Elmerraji had no positions in stocks mentioned.