- 5 Financial Sector Stocks to Trade for Gains in April
- 4 Big-Volume Stocks to Trade for Breakouts
- 3 Stocks Rising on Unusual Volume
- 3 Stocks Spiking on Big Volume
- A Small-Cap Stock With Very Big Potential
5 Big Stocks to Trade for Post-Debate Gains - views
BALTIMORE (Stockpickr) -- Last night’s presidential debate is already getting attention from investors. It’s got people wondering: Who’s going to be better for my portfolio, Obama or Romney?
A lot of time has been spent researching the connection between who sits in the White House and how stocks perform. And, not surprisingly, a lot of it is contradictory. Democrats and Republicans both think that they’re the better party for the stock market -- and they believe it.
So which vote means more cash in your account? The answer may be surprising:
It doesn’t matter.
Honestly, most investors put too much attention on the office of the president. Sure, the commander-in-chief plays a big role in the economy and the market (everything from the choice of a Fed chairman to the capital gains tax rate has an impact on your returns), but the truth is that it’s unlikely that one party is better for Mr. Market’s health than the other. The most recent studies from universities and the Fed come to that conclusion too.
But elections can still be good for stocks. The “presidential cycle” is one of the oldest investment cycles that have been measured by market technicians. It finds that the market tends to perform especially well in election and pre-election years. That bodes well for stocks for the rest of 2012 regardless of who wins.
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% of the time.
Every week, I take an in-depth look at big names that are telling important technical stories. Here's this week's look at the charts of five high-volume stocks to trade for gains.
First up is integrated oil and gas supermajor Exxon Mobil (XOM). Exxon has been swinging in a wide range this year, dragged behind the ebb and flow of oil prices. While that’s resulted in underperformance vs. the S&P 500 so far this year, the setup in this stock is signaling higher prices for shareholders in the coming weeks.
That’s because Exxon is currently forming an ascending triangle pattern, a bullish setup that’s formed by a horizontal resistance level above shares and an uptrending support level below them. Essentially, as shares bounce in between those two technical price levels, they’re getting squeezed closer and closer to a breakout above resistance (in XOM’s case at $92.50). When that happens, traders have a buy signal.
Exxon’s setup is very short-term, but it’s got some extra evidence pointing to upside from the pattern. Momentum, measured by 14-day RSI, is still in an uptrend, a good sign since momentum is a leading indicator of price. Trading volume points to upside too in Exxon – volume has been declining over the course of the pattern (which is the textbook volume behavior for an ascending triangle).
Ideally, we’ll want to see a volume spike when shares move above $92.50; that indicates that buyers are participating in the breakout. I’d recommend sitting on the sidelines until that happens.
Thompson Reuters (TRI) is forming the setup setup right now, just in the longer-term.
Like Exxon Mobil, Thompson Reuters is forming an ascending triangle setup with resistance coming in just below $30. It’s helpful to think of setups like these in real terms, not just in terms of geometric shapes; a “triangle” is a good way to describe the pattern, but it doesn’t say anything about why it’s happening. So it’s worth thinking of the TRI trade (or the XOM trade, for that matter) in terms of buyers and sellers.
Overhead resistance is a place where there’s historically been a glut of supply of shares. In other words, it’s a price where sellers have been more eager to sell and take gains than buyers were to buy. That’s why it’s acted like a ceiling for shares.
But on the other hand, the uptrending support level means that buyers do have some control of shares at lower levels. A breakout to $30 means that all of the excess selling pressure at resistance has been absorbed by increasingly eager buyers -- and it makes sense to buy when buyers have taken out weak-handed sellers.
Not all of the setups shaping up right now are bullish. Wal-Mart (WMT) is an example of a potential downside trade that’s been forming for the past couple of months. So while the Arkansas-based retail behemoth has been in rally mode for most of this year, buyers had better beware.
Right now, Wal-Mart is starting to form a double-top pattern, a setup that’s formed by two swing highs that top out at nearly the same level. The sell signal (or the short signal for more aggressive traders) comes when shares fall through the trough that separates the tops. For Wal-Mart, that level is $71.
At this point, the red flag in WMT is just that: a red flag that becomes a trade signal if shares fall through support at $71. If this stock continues consolidating sideways, it doesn’t make sense to sell it let alone bet against it.
Momentum broke its uptrend at the start of August, turning into a full-blown downtrend within the last month. RSI is still looking pretty neutral, but if the indicator’s downtrend continues below the 50 level, the evidence for a drop is much more compelling.
With that in mind, make sure that you’re only trading based on price. RSI is a very useful confirmation tool, but it’s got limited use on its own.
The bottom line is that $71 is Wal-Mart’s bottom line in the near-term.
Mitsubishi UFJ Financial Group
So what happens if WMT keeps going sideways from here? We get a setup similar to the one in Japanese bank Mitsubishi UFJ Financial Group (MTU).
MTU is currently forming a rectangle, a consolidation setup that’s common after big price moves. With the price swings that MTU’s been undertaking, it’s no surprise that investors need a while to sit back and absorb some of those price moves.
A rectangle is formed by a horizontal resistance level above shares and a horizontal support level below them (you can see how it starts off looking like a double-top). The easiest way to think about a rectangle is that it’s an “if/then trade”: If shares of MTU break above resistance, then it’s time to buy shares. If they slide below support, then it’s time to short. There’s no trade until one of those conditions is met.
Normally, a rectangle doesn’t have much directional bias. Unlike an ascending triangle, for instance, there isn’t much in MTU’s price action that indicates whether buyers are stronger or sellers are. But the fact that MTU has made volume spikes at resistance means that excess supply of shares is getting absorbed by buyers while support catches a bid more easily. That makes a breakout to the upside more likely than one to the downside.
For the upside trade, wait for resistance at $5 to get broken before buying.
Fomento Economico Mexicano
It’s been a good year for Mexican beverage stock Fomento Economico Mexicano (FMX). Year-to-date, shares have rallied more than 31%. But it’s how they’ve rallied, not how much they’ve rallied that makes this a unique trading opportunity.
Essentially, FMX has been locked in an uptrending channel for more than a year. The channel is significant because it makes the high-probability moves predictable for FMX. In other words, by drawing the dynamic support and resistance lines that bound this stock’s channel, we know where shares are likely to hit a wall to the upside and find a bid to the downside. Ideally, the best buying time comes when FMX is near support.
That’s the case for a couple of reasons. First, it gives FMX the most room to move higher before hitting resistance (increasing potential gains), and second, it reduces risk by keeping the smallest space possible between your buy price and support. Since a slide below the lower trendline would mean that the pattern is broken, you wouldn’t want to own shares anymore anyway – that’s why it’s a logical place to put a protective stop.
If you decide to take this trade, I’d recommend waiting for a bounce off of support before jumping in. It’ll cost you a couple points of missed gains, but it will also verify that there are still buyers willing to step in and keep shares in the channel. This stock should see higher ground in 2012.
To see this week’s trades in action, check out the Technical Setups for the Week 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.