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- Sometimes the “great economic thinkers” can be a little slow on the uptake. How many times during the past few months have we heard that the top is in? And, yet, as I have been saying all along, we keep making new highs. And how many times have we heard that this is going to be a “U,” “W,” or even an “L-shaped” recovery? We’ve covered almost every letter in the alphabet to describe this recovery, but I have only one letter for you, “P” — and that stands for PROFITS!So I’m going to give you three of the hottest stocks to trade in three hot sectors. These companies are about to report earnings, and they will almost surely explode the day they report, or shortly thereafter.
How do I know which stocks are going to be the monster movers? Well, it’s based on how investors will react to their upcoming earnings announcements. And by using , we can tell what investors’ reaction will be before they even know what it is. The best analogy I can think of is that technical analysis is the Doppler radar, which can pick up storm activity when it is still many miles away, telling you in which direction the storm is moving and how fast it’s coming at you. So technical analysis takes the emotion out of trading, allowing us to anticipate how investors will react given a certain set of events, so we can make our moves in anticipation of their reactions.
Keep reading to find out what the hot sectors are and the best stocks to trade now.
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Hot Sector #1: Biotech
Get your FREE Options Trader’s Guide to Technical Analysis here!Biotech stocks skyrocketed in 1999 and early 2000 during the genomics hype, and then crashed and burned so badly that it looked as if the next stop could only be zero. In 2009, though, this sector was the first to attract serious venture capital, and many biotech stocks made new all-time highs.
The wave of momentum in biotech stocks in 2009 was strong enough to push the AMEX Biotechnology Index () up through to an all-time high. Over the past month or so, though, the stocks that make up the index have been trading rather flat, because they have been in a consolidation phase after such a strong move up. But the BTK has broken out of one of the most you can find — the — and the index looks to be headed higher, especially if some of its leading stocks report good earnings this month.
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Hot Stock #1: Gen-Probe Inc. (GPRO)
Get your FREE Options Trader’s Guide to Technical Analysis here!Gen-Probe Inc. () is one of the components of the AMEX Biotechnology Index () that’s set to report earnings soon. This company, which develops, manufactures, and markets tests for disease diagnosis and blood screening, just signed an agreement to buy privately held Prodesse, a leader in molecular testing for influenza and other infectious diseases. GPRO plans to promote Prodesse’s FDA-cleared, highly sensitive assay for influenza, and this merger will mean huge top- and bottom-line growth for GPRO.
GPRO’s chart shows a very bullish inverted head-and-shoulders pattern that supports a continued breakout. This will mark the end of the correction the stock has seen due to the broader market’s correction. The chart is telling us that investors will very likely be bullish on the stock heading into 2010, and all the way through 2012.
My short-term for GPRO is $47.40, while my intermediate-term target is $54.97. But its chart has me confident that GPRO will blow through these targets with ease. The company reports earnings Oct. 29, and short interest is at an all-time high. So the buying frenzy after GPRO reports could turn into a stampede of buying when the short sellers realize the error of their ways and . This should send the stock soaring, so look at call options ahead of earnings.
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Hot Sector #2: Homebuilders
Get your FREE Options Trader’s Guide to Technical Analysis here!I never thought the day I’d say homebuilders were a hot sector again would come so soon after one of the biggest bubbles in our lifetime didn’t just pop, but imploded, with declines in some housing stocks of more than 95% and others going belly up. Seriously, one day Beazer Homes () was pushing $80, and the next it’s less than 30 cents. If you were one lucky son of a gun who bought that low in BZH, you would be up almost 1,800% today. So, this sector has clearly gone through some wild emotional swings.
But, alas, this is where technical analysis comes in. What we are seeing here is a in the PHLX Housing Sector Index () that did a successful back-test of the neckline. The neckline, which is formed by drawing a line connecting two high price points of the formation, is a key element of this pattern. The first high point occurs at the end of the left shoulder and beginning of the downtrend to the head. The second marks the end of the head and the beginning of the downturn to the right shoulder.
With HGX trading around $105, and my upside targets of $141 and $167 over time (not next week), I think we have a good chance to capture some gains in this sector.
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Hot Stock #2: Ryland Group (RYL)
Get your FREE Options Trader’s Guide to Technical Analysis here!Ryland Group () reports earnings Oct. 28, and while I can pretty much assure you that all of the homebuilders will be reporting anything-but-glorious news, what matters is how investors react to the news.
And when we look at the falling wedge reversal pattern in the chart above, which went on for years with bullish divergence, I can say with a high degree of certainty that the reaction, if not immediately (meaning seconds after they report), will eventually be positive (meaning within days).
So look to play the bullish side in the form of RYL call options, I think it’s best to stick with near-the-money calls with January through March 2010 expirations.
Get .
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Hot Sector #3: Gold
Get your FREE Options Trader’s Guide to Technical Analysis here!The Amex Gold Bugs Index () has been on a tear along with most of the rest of the market, but there is one major difference: HUI is a high-beta index (beta is a measure of the volatility, or systematic risk) that closely follows the rising price of gold.
Lately, we have been hearing that the U.S. Commodity Futures Trading Commission’s (CTFC) Commitments of Traders Reports show ongoing massive short positions in gold taken on by commercial traders. When the shorts overstay their welcome, it prompts a , and that is what has been causing the sudden massive rallies we have been seeing in gold. Commercial shorts in gold are at an all-time high, and this is a very bullish sign.
Currently trading around $440, I see HUI breaking out above $520. But, before that happens, the chart is saying that HUI will continue to rise another 80 points or so through the end of November, and then take a little pause. It should consolidate around the $520 level before breaking out again, so use that level to time your to exit from gold stocks.
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Hot Stock #3: Agnico-Eagle Mines Ltd.
Get your FREE Options Trader’s Guide to Technical Analysis here!Toronto-based Agnico-Eagle Mines Ltd. () is a component of the Amex Gold Bugs Index (). Not all Canadian gold stocks follow the loonie (the Canadian dollar), because some, like AEM, have mines in Mexico, the United States, Finland and all over the world. The company is extremely diversified, so the risk associated with the Canadian dollar being so strong, especially against the U.S. dollar, and the fear of profits being less due to forex exchange rates, is far lower with AEM than with many other gold stocks.
I think AEM could be a play not just for earnings, which are set to be reported Oct. 28, but for the parabolic rally we have been seeing in the gold sector. AEM just happens to be the best of breed, and it is in a pattern much like HUI. I like stocks that track an index closely, because it reduces the chance of getting thrown a curve ball.
I have an old saying: “Trade the easy stuff and drink the hard stuff.” And that is why I like AEM. Bottom line: When going with best of breed, we also get the best of profits.
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