by Chris Johnson | November 29, 2012 9:00 am
The world of technical analysis uses a number of terms to refer to different chart patterns. The Head-and-Shoulders, Cup-and-Handle, Double Top, Double Bottom and Death Cross are just a few of the interesting names we often speak about.
The last, the Death Cross, is a pattern in which a stock or index’s 50-day moving average crosses below its 200-day moving average, a sign of technically deteriorating conditions for a stock. The reverse of this is the Golden Cross, when a stock or index’s 50-day crosses above its 200-day. This situation is a technical sign that a stock’s strong intermediate-term trend is improving even further and is often a great indication that a stock is ready to move higher over the long run.
Two S&P 500 stocks have hit our radar over the last few days as their charts formed a Golden Cross. Not so coincidentally, one of these stocks has been an addition to Warren Buffett’s portfolio at Berkshire Hathaway (NYSE:BRK.A, BRK.B), according to the company’s recent 13F filing. Let’s take a look at these golden technical opportunities.
Precision Castparts (NYSE:PCP) — This company is far from the sexy dotcoms and tech companies that investors like to seek out. That’s probably one of the reasons that Berkshire has been accumulating positions in PCP because it tends to buy steady performers. PCP is an industrial company that fabricates everything from artificial hips and knees for medical prostheses to casting turbine disks and landing gear struts for the airline industry, which is one of the reasons that an improving economy will shoot these shares higher.
The chart is attractive because PCP shares have not only seen a recent Golden Cross, but are also breaking to new all-time highs. For those wanting a history lesson, the last time PCP shares formed a Golden Cross was in September 2010, when the share price was around $124. Not coincidentally, the shares were also headed toward challenging all-time high prices at that point.
The pattern then resulted in a 30% run over the following 12 months. We’re betting that the short-term traders are likely to get excited about riding Buffett’s coattails, perhaps so excited that the stock breaks above $200 before February.
The second Golden Cross occurring this week is Airgas (NYSE:ARG), another non-sexy industrial company. ARG shares are also pressing to new all-time highs as it challenges the $95 price. Options traders have been building positions in the January 90 calls, signaling that a crowd is chasing this trade higher. Typically, we would prefer that this not be the case, but here we’ll accept the crowd’s fondness for the trend.
Looking at the historical charts, the last occurrence of a Golden Cross for ARG shares happened last year in November, when the stock was trading at the $70 mark. After a bumpy two months of trading, the stock closed the year out 14% higher at $80.
Understanding that the $90 level will hold some resistance for ARG shares, the stock is a buy with a target of $100 before February.
As of this writing, Chris Johnson didn’t own any securities mentioned here.
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