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BALTIMORE (Stockpickr) -- There are no two ways about it: Investors are getting some love from stocks this Valentine’s Day.
Before this morning’s open, the S&P 500 had managed to climb 6.6% in the first month and a half of 2013, picking up a pace that’s best described as “breakneck.” Even though the big index’s gains don’t feel insane, they are. A big reason for the lack of emotion surrounding stocks’ climb has been volatility -- or the lack of it.
The VIX volatility index has been sitting below 13 at last count, scraping against the bottom of its historic range. At 13, options investors are pricing in a potential move of 3.7% in the S&P over the next 30 days -- or 45% annualized.
It’s worth noting, though, that the big index has been climbing higher at a 54% annualized pace so far in 2013.
A near-term low in the VIX isn’t necessarily a bad thing. While it indicates that we’re overdue for a volatility spike in stocks, injecting volatility into a bull market is a recipe for bigger gains, not a crash. That’s something to consider the next time someone points to a low VIX reading as a contrarian sell signal for stocks.
Where the rubber meets the road, there are some big opportunities shaping up in large individual stocks right now. That’s why, today, we’ll take a technical look at the price setups forming in five of the biggest names.
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.
One stock that hasn’t benefitted from the S&P’s 2013 climb is Amgen (AMGN), the $64 billion pharmaceutical stock. Instead, Amgen has mostly churned sideways this year. But that could be about to change thanks to a bullish setup that’s been forming in shares.
Amgen is currently forming an ascending triangle pattern, a technical setup that’s formed by a horizontal resistance level to the upside and uptrending support sitting right below shares. Essentially, as AMGN bounces in between those two technical price levels, it’s getting squeezed closer and closer to a breakout above resistance at $90. When the breakout happens, we’ve got a buy signal for this stock.
Pharmaceutical names have been acting “funny” for the last few months, stumbling only to make a move higher. That’s good enough reason to keep a tight stop on AMGN. The 200-day moving average is becoming a pretty good proxy for support right now, so it’s a reasonable place to put your stop.
We’re seeing the exact same setup in shares of smaller pharma firm Actavis (ACT). That’s not hugely surprising; correlation levels in the broad market are high to begin with, so firms within the same sector typically present similar trading opportunities at similar times. Like Amgen, ACT has resistance above shares (coincidentally also at $90) and uptrending support below.
A slightly steeping uptrend to ACT’s support line indicates that buying pressure is a little stronger in this stock. And buying pressure is the key force worth considering in this trade.
With any technical pattern, it’s critical to think in terms of buyers and sellers -- not shapes. After all, triangles, wedges 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 $90 is a place where a glut of sellers has been looking to unload shares and take gains from 2012’s rally. A breakout would mean that increasingly eager buyers were able to absorb all of the excess supply of shares that’s been sitting overhead.
That’s why it’s the ideal time to buy.
It’s been a challenging year for Microsoft’s (MSFT) shareholders. In the last 12 months, the software giant has shed around 8% of its value, prompting the stock to top hedge funds’ most-hated list. But now, there’s a glimmer of hope for MSFT.
That’s because this stock is currently consolidating in a horizontal trading range called a rectangle. The pattern is formed by a horizontal resistance and support level, at $28 and $26.50 respectively. It’s best to think of a rectangle like an “if/then trade”: If shares of MSFT break above resistance, then it’s time to buy shares. If they slide below support, then it’s time to short. There’s no trade until one of those conditions is met.
Momentum adds some evidence that a move to the upside is more likely for Microsoft right now. 14-day RSI has been in an uptrend since this stock started consolidating. Since RSI is a leading indicator of price, that bodes well for this beaten-down name. Still, don’t be a buyer until that $28 resistance level gets taken out.
Mid-cap car part maker LKQ (LKQ), on the other hand, has participated in the equity rally this year. Shares of the firm have clawed their way 46% higher in the last 12 months alone, in fact. And it doesn’t take an expert technical analyst to see what’s going on in shares right now.
LKQ is currently forming an uptrending channel, a trading range that’s bounded by a trend line resistance and trend line support level. LKQ has climbed its channel in a stair-step pattern. in other words, it’s rallied, then consolidated sideways before rallying some more. Those sideways periods are a very good thing because they give the stock a chance to establish support levels on the way up, and they give traders solid high probability entry points.
Right now, LKQ’s nearest resistance level is $23.50. If you’re looking to jump into this car parts maker, I’d recommend waiting for shares to push through that price first. Support levels at S1, S2 and S3 offer some downside protection, but I’d recommend putting a stop on the other side of the 50-day moving average. If shares fall through that price, the channel is broken, and you wouldn’t want to own the stock anymore anyway.
Last up today is EQT (EQT), a $9 billion integrated natural gas company. The setup forming in EQT may not be the most “textbook” setup on our list, but it’s one of the most tradable right now.
EQT is currently forming a bullish rounding bottom pattern. The catch is that the stock is forming the setup at the top of its recent price action. Ultimately, that doesn’t matter a whole lot -- even though this setup is coming in on the high end of EQT’s range, the trading implications are the same. This pattern is actually giving EQT a chance to consolidate and bleed off some overbought momentum after posting a big leg higher since this summer.
Resistance at $62 has proven to be a strong upside barrier since shares started consolidating. So, a breakout above that price marks the buy signal in this stock. With shares sitting just below $62, we could see a breakout sooner rather than later in EQT. Keep a close eye on this one.
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.