If a picture’s worth a thousand words, how much is a good stock chart worth? In the weeks ahead, possibly quite a bit. There are abundance of charts to watch as we move into November, with many that tell a broader story about the world economy and several more that may point to stock-specific trading opportunities.
Market Signals
Global financial stocks may reveal a great deal about what we can expect from the market in the final two months of the year. Across the world, a number of leading financials are trading just short of 52-week highs, but they are also only a few percentage points from falling below their 50-day moving averages.
For example, iShares MSCI Europe Financials Sector Index Fund (NYSE:EUFN) has tried — and failed — to take out the $19 level on four separate occasions in the past year. While the fund has fallen back in the past week, it remains within striking distance of this resistance level. At the same time, however, it closed Friday only 3.3% from its 50-day moving average at $17.48. EUFN should soon be reaching an inflection point.
Here in the United States, Citigroup (NYSE:C), Goldman Sachs (NYSE:GS), and Bank of New York Mellon (NYSE:BK) are in a similar position, as are Bank of Montreal (NYSE:BMO) and Royal Bank of Canada (NYSE:RY). The direction these stocks take in the weeks ahead could be a leading indicator as to whether it’s time to batten down the hatches or prepare for a year-end rally.
Outside of financials, watch the iShares MSCI Brazil (Free) Index Fund (NYSE:EWZ) ETF. This fund has lagged during the recent rally, returning 7.8% since June 1 and trailing the 13.5% return of Vanguard MSCI Emerging Markets ETF (NYSE:VWO) by a wide margin. As a result, the distance between its current price and previous low (8.5%) is a much narrower margin than is visible in China, India, or VWO. Watch the 52-week closing low at $49.07; if EWZ crosses below this level, it will trigger a clear short-term sell signal for the rest of the emerging markets.
Stock-Specific Opportunities
November could also bring meaningful downside for a number of individual stocks that are sitting right at long-established support levels.
In technology, three stocks could be in for a rough road if the market weakens further. Applied Materials (NASDAQ:AMAT), which is being hit by two-pronged impact of industry weakness and slowing growth in China, has trended sideways for the past year, finding support in the $10-$10.25 range five times. At its Friday close of $10.65, AMAT is again closing in on this level. If it breaks through, it will be entering a range where it hasn’t traded since early 2009.
Micron Technology (NASDAQ:MU) and Autodesk (NASDAQ:ADSK) are also nearing support. Micron is closing in on the $5 level, which it last breached in October last year en route to an intraday low near $4. Similarly, ADSK has bounced at the $30 level countless times in the past year; the last time it broke through (August 2011) it promptly traded all the way down to $25. If these stocks get driven under support in a weak tape, there’s potential for downside of 15%-20% until the next support is reached.
In the gold-mining sector, two South African ADRs are perilously close to their support lines: AngloGold Ashanti (NYSE:AU) and Gold Fields (NYSE:GFI). While gold stocks are notorious for head-fakes when it comes to the charts, both of these names experienced substantial downside the last time they broke support earlier this year. Keep in mind, though — the news flow regarding the labor unrest in South Africa can produce surprises that are independent of the technical picture for both stocks.
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McDonald’s (NYSE:MCD) also is in jeopardy of a breakdown, which could provide an attractive entry point for those who have been looking to take advantage of the stock’s 3.6% dividend yield. MCD has bounced at $86 twice this year, and it is now back at this level. If it falls through, it will mark a new 52-week low for the stock. Looking further back, $85 served as support in the third quarter of 2011. It’s a messy line, but one that bears watching for value-oriented investors, since a break could take the stock down as far as $82.50.
Finally, Borg Warner (NYSE:BWA) is approaching the $60-$61 range that has acted as support in the past year. The stock broke through this level in October 2011, quickly falling to $55 before rebounding over 40% in the following month. A breakdown in BWA — which could take that stock back to that $55 level — could be accompanied by similar weakness in the Physical Palladium Shares (NYSE:PALL) ETF. Since autos are a key driver of palladium demand, PALL and BWA tend to track each other in terms of direction, albeit not in the magnitude of their moves.
These charts should provide traders with some food for thought in the month ahead. If you believe other charts deserve a place on this list, add them into the comment section below.
