Charts of the Week: Cisco, Johnson Controls, Dell
WINDERMERE, Florida (Stockpickr) -- Technical analysis can be a great tool for investors who want to determine what the trend of an asset is before they decide to buy or sell. Consulting the charts can help you identify key market behavior before it happens, preparing you to follow the trend and make the right trade.
Technical analysis is a method of evaluating securities by relying on the assumption that market data, such as charts of price and volume, can help to predict future market moves and trends. Technical analysis will help guide you to discovering the chart patterns that offer the highest probability of success. Consulting the charts and combining your technical analysis with fundamental analysis can give you a real edge over other market participants.
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The current technical picture for the markets is very bullish. Both the
Dow Jones Industrial Average
and the
Nasdaq
broke out to new yearly highs on Thursday on heavy volume. The
S&P 500
has also started to breakout to new yearly highs today, so now we have a situation where all of the major indices are breaking out together. The markets are being propelled higher by the
Federal Reserve's
decision to implement
. Also, the political picture has started to change following the mid-term elections now that the
Republicans have picked up control of the House
and won a number of new seats in the Senate.
The question now is how long will this bullish uptrend last, and is the market starting to become too overbought? Buying stocks after the huge run we have seen off of the August lows is probably not the greatest idea, even if the market does decide to go higher. It's also becoming hard to find anyone who's bearish on the markets now, and in my experience, that's what usually happens when a correction is right around the corner.
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I think the best approach right now is lock in some profits and start taking some risk off the table. Another strategy you could use is to start buying some downside protection with put options to hedge some of your long positions you decide to keep on. You could also start trailing your stops higher so you don't give back all of the profits in case the market does decide to have a correction.
Here's a look at
that are piquing the interest of the Stockpickr community.
Stockpickr member tsrivangipuram submitted
Cisco Systems
(CSCO) - Get Report
. This company designs, manufactures and sells Internet-protocol-based networking and other products related to the communications and information technology industry worldwide.
If you take a look at the chart, you'll see that the stock is now trading above both the 50-day and 200-day moving averages, which is a bullish sign. The stock has also recently broken above a downtrend line and bounced off that downtrend line to shoot up higher. This is also a healthy sign, but the company is due to report earnings next week, so we won't have a good idea of the future trend in the stock until we see how they report.
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My take based off the chart is that Cisco will probably trade higher up to toward $25 a share, which is the next area of overhead resistance. If the stock can manage to take out that resistance level, then look for shares to test $26 to $27 a share.
From a bullish standpoint, I would not get very excited about this stock until it takes out $27.74 a share, which is an area that the stock has topped out at twice in the past three years.
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Stockpickr member tsrivangipuram also submitted
Dell
(DELL) - Get Report
. This company designs, develops, manufactures, markets, sells and supports computer systems, as well as provides related services worldwide.
If you take a look at the chart, you'll see that is starting to run into some stiff resistance at around $15 a share. The stock is also starting to trend lower and print some lower highs and has moved outside of its uptrend channel that started back at $12.12 a share.
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This could mean that the stock is just simply resting and doing some consolidation before heading back up, but one problem I see is that the buying volume during the past couple of weeks has started to tale off dramatically.
The fact that the stock is starting to follow the lack of buying volume tells me that the shares are setting up to trade lower. The first area of support will come in at around $14 to $13.80 share. If Dell breaks those support levels, I would look for the stock to trade back toward the 50-day moving average at around $13.30 or possibly even lower.
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From a bullish perspective, if Dell can manage to break about $15 a share, then the next major level of resistance will come in at around $17.50. This stock doesn't start to look really bullish to me until it does take out that major resistance at $17.50. However, with the way the stock is acting right now, I just don't see it happening anytime soon. It looks like the stock is setting up to trend lower, and the lack of volume is confirming that action.
Stockpickr member owenhouse submitted
Johnson Controls
(JCI) - Get Report
. This company operates in building efficiency, automotive experience and power solutions businesses worldwide.
If you take a look at this chart, you'll see that Johnson Controls is in a beautiful uptrend. This is exactly the kind of uptrend you would want to see in any stock that an investor might hold a long position in. Since the stock bottomed in August, the shares have been doing nothing but acting bullish and making higher lows and higher highs.
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Even more bullish for this stock is the fact it just broke above some major overhead resistance at around $35.50 a share. This breakout was accompanied by strong volume which leads me to believe the stock wants to go higher. However, the relative strength index indicator is currently well above 80, and that high of an RSI is usually what you see when a stock is way overbought.
Considering that high RSI, I would not be initiating new positions at this level, but if I was already long JCI, I would stay with the stock because the uptrend and the breakout look very bullish. If I was looking to buy this stock, I would wait for a pullback or a healthy consolidation before I jumped in with new long position. Overall though, the stock looks very good, and the
GM
IPO should help to push it higher.
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Stockpickr member kjp712 submitted
MercadoLibre
(MELI) - Get Report
. This company hosts an online commerce platform in Latin America, with operations in Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay and Venezuela.
This stock had been a major market leader during the last six months, with shares up 26%, but that leadership role is quickly ending. If you take a look at this chart, you'll see that the stock has broken a very bullish pattern of higher highs and higher lows that it was demonstrating since May. The stock topped out at $76 in early October then quickly dropped back toward $60 before making a run back towards the 50-day moving average and failing at that level.
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Now MercadoLibre is starting to form a new pattern of lower highs and potentially lower lows. I drew in a trend line on the chart that shows how the stock is now failing at the trend line instead of breaking out and trading above it; this is bearish action. Even more bearish for MELI is that the stock is now trading countertrend to the overall market since the stock topped out in early October.
My take here is that this stock wants to go lower, which is even more probable considering that the downside volume is starting to expand. On Thursday, 2.9 million shares traded, and today 1.9 million traded, compared with the three-month average daily volume of around 911,000 shares, as the stock fell to $61.24 today. If this stock closes below its near-term support at $60.20, then a test of the 200-day moving average at $55.89 could be in the cards. The trend for now for MELI is to sell any bounce until you see some consolidation and volume come in that tells you the new downtrend is over.
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For more technical analysis on stocks such as
Royal Dutch Shell
()
and
Fiserv
(FISV) - Get Report
, check out the
portfolio on Stockpickr.
-- Written by Roberto Pedone in Winderemere, Fla.
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At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.
