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5 Big Stock Charts You Need to See - views
BALTIMORE (Stockpickr) -- Well, we couldn’t have asked for a much better start to 2013. Just a couple of trading days into the New Year, the S&P 500 has managed to rally 2.33% -- and it’s up more than 4% from Monday’s open. The Nasdaq Composite is even managing to do one better, up around 4.75% over that same period.
Remember, we’re talking about three trading sessions here.
Today, as we look to wrap up the first trading week of 2013, investors and traders have good reason to start feeling optimistic about stocks. I’ve been saying for the last few months that there’s a mountain of cash sitting on the sidelines (and away from stocks) right now. When it eventually has to resort to investing in equities again, we could be looking at the start of a big leg higher.
And now, between the increased money printing at the Fed and the historic low yields risk-free assets like treasuries are offering in return, that money is starting to trickle back into stocks; investor sentiment is trickling in with it. “New month, new market” has been a mantra that equities have followed to a T for the last year and change, so it follows that Mr. Market is showing us a distinctly more bullish side now that the calendar has flipped over to 2013.
That’s why, today, we’re taking a technical look at five big tradable charts that could pad your portfolio in the new year.
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.
SPDR S&P 500 ETF
First and foremost, it makes sense to take an updated look at what’s going on with the market. In last week’s column, I highlighted the SPDR S&P 500 ETF (SPY) as a proxy for the broad market -- and a lot has changed since then.
Last week, the S&P 500 was in the middle of a minor correction, pulling back to the 50-day moving average in what many saw as a bearish move. But a longer-term look at a chart of SPY made it clear that the market was just showing traders a pretty tepid correction in the context of a bigger primary uptrend.
This week’s rally is significant -- it broke SPY out of the fiscal cliff-induced derailment you can see in the chart above. More significant, it brings it up to a test of current resistance just above $145 for the ETF. If we can get a confirmed breakout above that level early next week, traders can expect to see a lot more upside in January. After all, thanks to high correlations with the S&P, a rising tide tends to lift all ships with this index.
It’s been quite a year for PulteGroup (PHM). Shares of the $7 billion homebuilder rallied close to 200% in the last year, buoyed by some auspicious signs of a rebound in the new home market. After such a big move, it’s only natural for investors to feel a little anxious about jumping onboard here. But a bullish price pattern in Pulte points to even more upside for this momentum name in 2013.
Right now, PulteGroup is forming an ascending triangle. The ascending triangle is a price pattern that’s formed by horizontal resistance to the upside and uptrending support below shares. Essentially, as PHM bounced in between those two technical price levels, it was getting squeezed closer and closer to a breakout above resistance -- that’s the buy signal for this pattern. Like the broad market, Pulte is testing a breakout this week, sitting right above $18.50 resistance. Ideally, I’d like to see a more definitive move higher before calling it a buy signal; PHM saw these prices back in December, only to move back within the channel.
That said, and momentum adds some extra confidence to the trade this time around. 14-day RSI is locked in a well-formed uptrend right now. Since momentum is a leading indicator of price, that’s a bullish sign. From here, I’d recommend waiting for the move above Wednesday’s highs. When that happens, we’ve got the confirmation to buy PHM.
The 50-day moving average is a strong place to put a protective stop from here.
We’re seeing a similar pattern in shares of Open Text (OTEX). Like Pulte, this business software firm is forming an ascending triangle pattern, in this case with resistance at $57.50. And while OTEX isn’t testing a breakout just yet, it’s about a hair’s breadth away from popping above that resistance level. When it does, traders have the buy signal for this stock.
Whenever you’re looking at technical price setups, it’s important to think in terms of buyers and sellers. After all, it’s not magic or geometry that’s causing these patterns to be tradable -- it’s supply and demand.
The horizontal resistance level in OTEX is a place where sellers have previously been more eager to sell and take gains than buyers have been to keep buying. But uptrending support tells us that buyers do have some control over shares at lower levels. The breakout means that buyers were able to absorb all of the excess supply of shares that was sitting above $57.50. Without that price barrier, this stock should have a lot more room to run.
Just remember that it’s critical to wait for the breakout to happen before buying.
It’s been a less amazing year over at Microsoft (MSFT). The software behemoth spent most of 2012 churning sideways, only giving shareholders around a 4% gain over the course of the last 12 months. That doesn’t even approach half of what the broad market returned over that same period.
But Microsoft (and its shareholders) could be in store for a change of fortunes thanks to a sideways consolidation that’s been forming for the last month and change. Consolidations occur after big moves, in MSFT’s case, the big decline that’s been in force since the middle of September. Because the sideways price action is bounded by horizontal resistance and support, it gives traders a black-and-white way to determine whether it makes sense to buy or to remain a seller.
Resistance at $27.75 is the big price level to watch for investors looking for a reversal. That’s because it’s the price that’s acted like a ceiling over the course of the consolidation channel – there’s still a glut of sellers above that price, but once it’s taken out, we’ve got a buy signal. MSFT’s downtrend broke earlier this week when the sideways channel proved stronger than selling pressures. That’s a good early indication of strength for this stock.
Last up is brokerage firm TD Ameritrade (AMTD), the one firm that’s primed to benefit most directly from a rally in stocks -- and its chart shows it. AMTD has gotten hammered over the last year, underperforming the broad market by around 20% since last January. That’s come largely at the hands of prolonged low trading volumes for stocks and historically low interest rates earned on its cash float -- an equity rally fixes both of those problems.
But that’s a long-term thesis. In the short term, the double-bottom breakout in AMTD holds the key to gains. A double bottom is a reversal pattern that’s formed by two swing lows that bottom out at approximately the same price level. They’re separated by a peak, a level that marks the trigger point for this trade. AMTD broke out above its peak on Wednesday, confirming the move with yesterday’s open and close above that level.
This is a long-term pattern, and as a result, it’s got long-term trading implications. That means that we could see AMTD move higher pretty quickly over the next couple of months. RSI adds some extra confidence to this trade as well – but price is the most important thing to watch here for an entry. I’d recommend going long on this stock’s next white bar day; then, I’d recommend keeping a protective stop in place just below $15.
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.