Stocks to Watch 3/17


March 17, 2013 (9:00 pm)

As we head into a new week, the Euro is gapping down due to the Cyprus bailout news. It’s hard to imagine that the small island nation of Cyprus is the reason the Euro starts breaking down. Since the upside momentum has been so strong over the past few weeks, we expect any dip to be bought. Not until we see a small correction followed by a failed re-test of the highs do we expect the market to correct in the intermediate term. We’ve “called” the top a couple of times already this year. We won’t make that mistake again. While we watch these cracks form in the market, we’ll be watching for signs of a topping pattern. While we can’t conclusively call that this is the start of a correction, you never know. It just may be, and we’re watching closely. In the meantime, here are some stocks we’re watching.

STOCKS WE’RE WATCHING

American International Group. AIG has formed a five-month rising wedge and recently had a false breakout. The shares are again testing the lower trend line. A break below will likely be followed by a re-test of the bottom trend line before filling the $3 target move down. This is one we’re still watching, without any current trades.

AIG

Apple. Shares of AAPL are at an interesting and potentially very significant inflection point. On Friday, the shares gapped above the descending trend line that has acted as resistance all year. That’s a very bullish signal. On the other hand, it’s still within a shorter-term pattern that looks an awful lot like a bear flag. We shouldn’t be surprised that AAPL is giving us mixed signals. In order to protect against an upside move due to any number of potential catalysts in the next few weeks, we began accumulating October call options. We’re looking to add more on a decisive breakout of the bear flag.

AAPL Breakout

The longer-term view of the descending trend line (along with a number of others) are illustrated below. The green trend line towards the right is the same trend line we showed above. The next significant line of resistance is $455. A re-test of the $430 level (where the green trend line will be to open this week’s trading) could also be a bullish sign if it’s able to successfully re-test and bounce off that support.

AAPL Trend Lines

Boeing. Shares of BA have seen a massive bull run over the past two weeks. It has seen almost ten days in a row of closing above its upper Bollinger Band. The upside target from a symmetrical triangle breakout was $84, which was successfully exceeded. Further, it’s $10 above its 50 DMA and sitting at an 81 RSI on the daily chart. These are all approaching very extreme levels. We entered slightly in-the-money bearish April puts on Friday.

BA

Bank of America. Shares of BAC have formed a bearish rising wedge, with a series of gaps below its current level. It’s also sitting at an hourly RSI that has typically preceded near-term retracements. We entered a small bearish position for a quick swing trade with the expectation of a near-term pull back.

BAC

Blackberry. BBRY broke out of its symmetrical triangle and has (so far) successfully re-tested the upper trend line. We entered bullish April calls under the expectation of a major bull run in the coming weeks (the triangle has a target price of approximately $21. A fall below $14.50 will negate our expectation and is where we’ll unwind the trade.

BBRY

Here’s a nearer-term illustration of the BBRY symmetrical triangle. You can see the successful re-test of the upper trend line. Unfortunately, the re-test wasn’t as strong as we hoped. We’re closely watching this one to see if this was simply a false breakout before reversing. However, we’ll stick with our current expectation until proven wrong.

BBRY Near-Term

Las Vegas Sands. LVS bounced off the $48 level two weeks ago, which represents very long-term support. It has since formed a symmetrical triangle with a target of $60. We took a small position in bullish April calls with the expectation that it continues up towards our target.

LVS

Starwood Hotels. Shares of HOT bounced (I didn’t say it was a clean bounce, but a bounce nonetheless) off very significant support over the past couple of weeks. It has since formed a fairly well-defined cup and handle pattern. That’s an extremely bullish price pattern. We took a bullish position in the shares under the assumption that it breaks out of this pattern.

HOT C&H

Here’s a nearer-term view. Along with the cup and handle formation, HOT is also forming an ascending triangle. A break above $63.40 will confirm the successful breakout of both the cup and handle pattern and the ascending triangle. A break below $62 will negate our thesis.

HOT Triangle

MARKET OUTLOOK

SPY Trend Lines. The SPY (S&P500 ETF) tested the middle trend line below. That has proven to be fairly significant support during a majority of the rally. If the Cyprus bailout “crisis” proves to be a bearish catalyst for the market, we expect additional significant support at the $152 level.

SPY

SPY Rising Wedge. That $152 level is also significant for another reason. It defines the top trend line of the four-year rising wedge that has formed on the SPY since the bottom of the financial crisis. What we are seeing in the markets could very well be a false breakout of this wedge. If that is the case, we could see a devastating correction in the coming year. A break below the $147 level could initiate a severe correction. That’s just something to be mindful of at the current time. We wouldn’t necessarily advise positioning for this outcome, though. As Art Cashin says in one of our favorite quotes: “don’t plan on the end of the world, because it only happens once.”

SPY Rising Wedge

BONUS! As a bonus chart, we included an illustration of a concept that Jesse Stine has mentioned several times. His thesis is that the Dow Jones Industrial Average sees a significant correction any time it gets to a level between 900 and 1200 points above its weekly 34 moving average. See the chart below. The Dow is currently 1,100 points above its 34 MA. Coincidence?

34 WMA