5 Big Stocks to Trade for Gains

BALTIMORE ( Stockpickr) -- Not surprisingly, what started off as a slow week is ramping up following high-profile earnings announcements (including Apple's (AAPL) new record earnings), economic data and speculation that Ben Bernanke and the Fed could start another bond buying spree in 2012.

As more eyes start turning to Mr. Market, investors should expect volatility to rear its head again. Remember, markets have been fairly controlled so far in 2012, despite the fact that drama from Europe and economic data releases continue to hit Wall Street on a daily basis. The big conclusion to draw from that is that by and large, though, stocks are moving based on technicals this month.

>>5 Earnings Stocks Set for a Squeeze

With the S&P 500 still shoving its way above former resistance at 1290, that's not such a bad thing - even better, high correlations mean that there are some attractive technical analysis-driven setups in a handful of Wall Street's biggest stocks right now.

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% of the time.

Every week, we take an in-depth look at large-cap stocks that are telling important technical stories. Here's this week's look at the technicals of five must-see stocks.

BHP Billiton

2012 is already shaping up to be a good year for shareholders of BHP Billiton ( BHP) -- the $213 billion resource stock is up more than 13% already year-to-date, making up for much of 2011's poor performance. While this year's rally has been impressive, signs point to additional upside in shares right now.

That's because BHP Billiton is currently forming an ascending triangle bottom, a bullish pattern that indicates a reversal in shares from BHP's October lows. The ascending triangle can be spotted by a horizontal resistance level to the upside (in BHP's case at $85), and uptrending support to the downside. As BHP bounces in between those two technical levels, shares are getting squeezed closer and closer to a breakout above that $85 level. When that breakout happens, buying BHP becomes a high-probability trade.

Adding some assurance to this setup is the fact that momentum, as measured by 14-day RSI, has remained in an uptrend since August's swing lows. When the breakout happens, I'd recommend a protective stop at the 200-day moving average.

BHP Billiton, one of the top-yielding metals and mining stocks, is one of Renaissance Technologies' top holdings.

Brasil Foods

A similar setup is taking place in shares of Brasil Foods ( BRFS) right now. Like BHP, shares of Brasil Foods have a strong horizontal resistance level that's acted as a "price ceiling" for shares in the past, and uptrending support acting like a "price floor." The resistance level to watch in this stock is $21.50; a breakout above that price is a buy signal.

Also like BHP, Brasil Foods has maintained an uptrend in RSI, a factor that tells us the upside momentum in shares remains intact.

With an ascending triangle, one important question to ask is why it works. The key is that resistance level above shares. Essentially resistance levels exist where there's a glut of supply for shares -- they're prices where sellers are more eager to unload their positions than buyers are to buy them.

In an ascending triangle, uptrending support tells us that buyers have control of shares below that key resistance level, and that we'll likely see a retest of resistance. A breakout is a buy signal because is shares can sustain a price above $21.50, we know that buyers have absorbed the excess supply at that price level and there's no longer that constraint on share price.

Until BRFS can hold above $21.50, however, this isn't a high probability trade.

BRFS shows up on a list of 10 BRIC Stocks for 2012.

Telus

Telus ( TU) is another name that's been delivering strong performance. In the trailing 12 months, this Canadian communications giant has generated returns of more than 16% on shares -- not counting the company's hefty 4.3% dividend yield. And right now, the technicals point to additional upside in shares:

Back at the end of December, Telus broke out of a textbook inverse head and shoulders pattern, a setup that indicates exhaustion among sellers. From that point, shares rallied more than 5%, but reversed lower at the start of the new calendar year. The reversal wasn't a bad sign, though. Instead, it's a throwback.

>>5 Breakout Stocks to Eye for a Buy

A throwback occurs when a stock reverses after a breakout to come back and test newfound support at the breakout level. If the level acts like support, then traders have a second chance at a low-risk entry in shares. That's exactly what happened in Telus -- the pattern's neckline at $52 acted like support, and shares are coming back to retest the dashed resistance line at $54.

Think of a breakout above $54 as "stage 2" of the original inverse head and shoulders setup in Telus. Wait for that level to get breeched before buying it.

China Mobile

Another huge international communications stock that's tradable this week is China Mobile ( CHL), the world's largest mobile phone carrier. With more than 600 million subscribers, that's a title that China Mobile earns pretty easily.

But ignore the fundamentals for a minute -- traders should be paying attention to the setup in China Mobile's shares.

>>5 Technical Setups to Trade This Week

That's because China Mobile is currently forming an "if/then setup," the result of CHL's sideways consolidation over the last several months. The horizontal resistance and support range make for a well-defined contingent trade in this stock:

Simply put, CHL's if/then setup works like this: If shares break out above $50 resistance, then buy. If shares break down below $46.50 support, then CHL is a short candidate.

Either way it progresses, I'd recommend placing a protective stop back just within the channel.

Lockheed Martin

Meanwhile, plenty of investors have been paying attention to Lockheed Martin ( LMT) lately, but not for good reasons. With a market capitalization of $26.5 billion, Lockheed is the largest publicly traded company with a short interest ratio above 10. That number means that shorting in Lockheed is so concentrated that it would take more than two weeks of buying for short sellers to close their positions at current volume levels.

But that short squeeze scenario is made even more interesting when you look at Lockheed's chart. This stock has been locked in an uptrending channel since August, locked between dynamic resistance and support levels. Lately, LMT has been testing trendline resistance -- a breakout above that level could point to an acceleration of this stock's uptrend. In other words, it could trigger some serious pain for short sellers.

Barring that breakout, a trade with significant potential comes on LMT's next bounce higher off of trendline support. When that happens, look to buy shares as they climb back up the channel. I think we'll see one of those scenarios play out when Lockheed announces its fourth-quarter earnings this afternoon -- wait for the announcement before taking a position in this defense stock.

Lockheed, one of the top-yielding aerospace and defense stocks, shows up on a recent list of 5 Safe, High-Dividend-Yielding Stocks.

To see this week's trades in action, check out the High Volume Technicals portfolio on Stockpickr.

-- Written by Jonas Elmerraji in Baltimore.

RELATED LINKS:



Follow Stockpickr on Twitter and become a fan on Facebook.
At the time of publication, author had no positions in stocks mentioned.

Jonas Elmerraji 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.

If you liked this article you might like

Dow, S&P 500 and Nasdaq Finish Higher After Late Rally

Dow, S&P 500 and Nasdaq Finish Higher After Late Rally

Closing Bell: LIVE MARKETS BLOG

Closing Bell: LIVE MARKETS BLOG

Freeport-McMoRan Is On the Run

Freeport-McMoRan Is On the Run

A Boring Day In the Stock Market, Sorta

A Boring Day In the Stock Market, Sorta

Stocks Hold at Prior Levels After Fed Leaves Rates Unchanged

Stocks Hold at Prior Levels After Fed Leaves Rates Unchanged