by Daniel Putnam | July 20, 2012 11:03 am
Auto, financial and mining stocks have been performing poorly of late, but seven stocks in these groups are holding key support levels. This not only provides investors with some potential trades, but it also offers an indication of the health of the broader market.
Although the major indices have been exceptionally strong in recent weeks, it would be difficult to see the rally continuing if the stocks shown here begin to break down. Thus, even those who aren’t inclined to trade individual stocks based on technical analysis might be well served to keep a close eye on these charts as we move through the summer.
The auto sector probably is the most important to watch in the coming weeks. Both Ford (NYSE:F) and GM (NYSE:GM) are right at major support lines, and Ford has finished forming the right shoulder of a well-defined head-and-shoulder pattern. At this point, both stocks have become dependent on the global growth story. Given that expectations already are very low on this front, and that the two stocks are trading at valuations that indicate disaster is at hand — Ford is at 6.0 times forward earnings, GM is at 4.9 — both may be worth a look here. If they do break down, the better trade probably is to be patient and use the drop as a buying opportunity, rather than trying to jump in from the short side.
Ford’s breakdown level is at $9.07, versus Thursday’s close of $9.33. GM has more room after its gain of the past two days has brought it to $20.15, versus support at $19.11. Ford reports earnings July 25, GM on Aug. 2.
The financial sector also is home to three charts that are very close to support levels, indicating the stocks might be a source of beta for traders. Morgan Stanley (NYSE:MS), which had been showing signs of life in the past two months before reporting disappointing earnings Thursday, still is comfortably above its 52-week low of $11.58 and its more recent low of $12.26. If Morgan Stanley can hold support after its weak earnings report, the stock might merit consideration in the second half — especially if its 200-day moving average begins to move into an uptrend.
Goldman Sachs (NYSE:GS) and iShares MSCI Europe Financials Sector Index Fund (NYSE:EUFN) are in a similar position as Morgan Stanley, with modest uptrends, stabilizing 200-day moving averages and multiple hits on support. These both look like potential long-side opportunities, but extreme caution is warranted since they undoubtedly will be punished if the markets go back into risk-off mode. Goldman’s lower trendline terminates at $91.22, while EUFN’s support is at $13.73.
In the mining sector, Freeport McMoRan (NYSE:FCX) and Teck Resources (NYSE:TCK) are similar to Ford in the sense that they are wrapping up broad head-and-shoulder formations. They are showing no signs of breaking under the neckline as of yet, and FCX rallied over 4% on Thursday after reporting better-than-expected earnings.
However, anyone who is long in either of these names needs to keep an eye on the charts as long as China continues to report weaker growth. The support lines for TCK and FCX are $28.61 and $30, respectively. This leaves plenty of room for these stocks to fall and still be in a sound technical position, but these levels still bear watching given the volatility in the mining names and the ominous presence of multiyear head-and-shoulder patterns. Teck reports on July 23.
As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.
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