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BALTIMORE (Stockpickr) -- The S&P 500 has effectively traded flat this week -- and you can practically hear the sigh of relief from investors who’ve been sitting white-knuckled at their computers waiting for the worst to happen.
Here’s a hint: It’s not happening.
While U.S. markets are in wait-and-see mode, overseas stocks are carrying on their own recovery rallies, with Japan’s Nikkei 225 up close to 2% so far this week -- and around 10% year-to-date. Over in Europe, stocks are taking a breather too, but only because they’ve already shoved their way to new record highs in many major indexes. Make no mistake, those factors bode well for U.S. equities to keep on keeping on.
That’s why we’re taking a technical look at the price setups forming in five of the big names on Wall Street.
If you're new to technical analysis, here's the executive summary.
Technicals are a study of the market itself. Since the market is ultimately the only mechanism that determines a stock's price, technical analysis is a valuable tool even in the roughest of trading conditions. Technical charts are used every day by proprietary trading floors, Wall Street's biggest financial firms, and individual investors to get an edge on the market. And research shows that skilled technical traders can bank gains as much as 90% of the time.
Every week, I take an in-depth look at big names that are telling important technical stories. Here's this week's look at the charts of five high-volume stocks to trade for gains.
Just a month in, and 2013 has already been a good year for Google (GOOG). Despite a temporary pre-earnings sell-off, shares of the search giant have rallied close to 9% so far this year. And now, it looks like this stock could have further to run this year.
The price action in Google doesn’t get much simpler. Google is currently bumping its head up against new highs, testing the same $770 level that shoved shares considerably lower back in October. Investors should be watching for a breakout above that price.
Making new highs is significant from an investor psychology standpoint because it means that everyone who has bought shares in the last year is sitting on gains. As a result, the “back to even” mentality is less of a concern than it would be for a name with a higher proportion of shareholders sitting on losses.
Ultimately, technicals all come down to buyers and sellers, and resistance at $770 is an indication that there’s still a glut of selling pressure at that level. When buyers become more eager to pile onto Google positions than sellers are to take gains, then we’ll have a high-probability trading opportunity in this stock.
Momentum, measured by 14-day RSI, looks positive here too. This time around, GOOG isn’t going up to test resistance while it’s already in overbought mode. Until the breakout, I’d recommend sitting on the sidelines.
Oil giant ConocoPhillips (COP) has undergone some big changes in the last year; the firm completely transformed itself in May when it spun off its downstream assets into Phillips 66 (PSX), a move that’s unlocked considerable value from shares and made COP itself more competitive. We’re seeing investors’ increasing sentiment in this stock’s price action right now.
Like with the Google chart, you don’t need to be an expert technical analyst to figure out what’s going on in COP right now: This stock is trading higher in a channel. The support and resistance levels on the chart have acted as consistent barriers for COP’s price action since the summer -- and now, they give us a high probability range for this stock to trade within. As you might expect, the ideal time to be a buyer is on a bounce off of support; that’s exactly what we may see today.
When you’re looking to buy a stock within a trend channel, buying after a bounce off of support makes sense for two big reasons: It’s the spot where shares have the furthest to move up before they hit resistance, and it’s the spot where the risk is the least (because shares have the least room to move lower before you know you’re wrong). With shares right at that support level, I’d recommend keeping a close eye on this one.
We’re seeing a very similar setup in shares of BHP Billiton PLC (BBL) right now. That’s not hugely surprising -- BBL and COP are two large-cap commodity-driven stocks, so their price charts are all but guaranteed to correlate highly with one another. Just like with COP, we’ll want to see a bounce off support for the buy signal to trigger in BBL.
More recently, the 50-day moving average has acted as a good proxy for trend line support. That simplifies things for traders looking to enter this stock on a bounce; setting a trade alert (through your broker) when shares close below the 50-day will provide an early warning that this setup is failing.
I’d recommend keeping a protective stop just below that level.
General Growth Properties
Real estate investment trusts (REITs) have been on fire in the last year and change, enjoying a combination of a rebound in real estate prices and the price benefits of huge yields in a zero-rate environment. Mall owner General Growth Properties (GGP) is one example of a REIT that’s set to move even higher in 2013 thanks to the technical setup that’s been forming in shares for the past few months.
GGP is currently forming an ascending triangle pattern, a price setup that’s formed by a horizontal resistance level above shares, and uptrending support to the downside. Essentially, as GGP bounces in between those two technical price levels, it’s getting squeezed closer and closer to a breakout above that resistance level. Complicating things a little is the fact that GGP’s resistance level is actually a range between $20.50 and $21. While the 50-cent range obscures the buy signal here a bit, the trading implications are still the same.
If you’re looking to buy the breakout in GGP, just fit the breakout level you use to your risk tolerance. More risk-hungry investors should be looking to enter closer to the bottom of the range at $20.50, while the risk-averse should use $21 as the buy signal for this stock. The earlier entry provides more potential upside, but a slightly higher chance of a fakeout. Either way you play it, keep a protective stop just under the 50-day moving average.
Last, but certainly not least, is commercial food service firm Sysco (SYY). Sysco is forming the exact same setup as the one we’re watching in GGP right now: an ascending triangle pattern. In this case, resistance comes in at $32, and shares are testing uptrending support as I write. The resistance level in SYY is a much firmer level, so a close above $32 is a sufficient buy signal for this trade.
Remember, with any technical pattern, it’s critical to think in terms of buyers and sellers -- not shapes. After all, triangles, channels and the like are a good way of describing what’s happening on a chart, but they’re not the reason why it’s tradable.
Instead, that all comes down to the supply and demand caused by those buyers and sellers. The horizontal resistance level at $32 is a place where a glut of sellers has been looking to unload shares. A breakout above that price tells us that increasingly eager buyers have absorbed all of the excess supply of shares sitting at that level. It’s crucial to wait for that breakout before putting your money on the line.
To see this week’s trades in action, check out this week’s Must-See Charts portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.