Stock Quotes in this Article: BAC, CNP, NFLX, SPY, XRX

BALTIMORE (Stockpickr) -- Where are stocks headed from here? That’s the $16.7 trillion question this month as earnings season ramps up and more investors give this rally a good, hard look.

Yes, that’s right, U.S. stocks are in rally mode right now. The S&P 500 has moved 16% higher over the course of 2012, more than 14% of it since the start of June. For most investors, it just doesn’t feel like it.

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There are a couple of reasons for that, of course. First, investor anxiety over stocks is extremely high right now; and with many people underweighted in equities, many of the folks who’ve missed this rally didn’t realize the extent of the uptrend in stocks. That fact is sending many fund managers in catch-up mode to end the year, as the pros try to make up lost ground between their performance and the performance of their benchmarks; expect accelerated institutional stock buying this quarter as a result.

But with the month-long slump that the S&P has been on, does it still make sense to buy stocks right now? I’m about to show you why it does -- and why five big names look like strong technical trades this week.

If you're new to technical analysis, here's the executive summary.

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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 it makes sense to look at what’s going on with the broad market. We’ll do that with the SPDR S&P 500 ETF (SPY). It’s most investors’ favorite way to get exposure to “the market” because it mirrors the price moves in lock step with the S&P 500.

So why exactly should you be betting on stocks right now? A quick look at this chart has the answer.

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As you can see, the broad market has been trending higher since the beginning of June, bouncing higher within a well-defined price channel. That channel is significant -- it gives investors a glimpse at the high-probability moves for Mr. Market; since those trendlines identify gluts of supply and demand in the market, the S&P is a lot more likely to remain in the channel than it is to exit.

And so even though stocks have corrected for the last month, SPY bounced perfectly off of trend line support this week. That tells us that the channel is still in force. A few days before the bounce, momentum (measured by 14-day RSI) broke its downtrend and moved back into its bull range. That bodes well for being a stock investor in the fourth quarter.

Really risk-averse folks can mitigate some downside risk with a protective stop placed under the 50-day moving average.

CenterPoint Energy

$9 billion utility stock CenterPoint Energy (CNP) is showing us a very similar setup right now. Like SPY, CenterPoint is moving higher in a trend channel that’s been in force for a while. In fact, CNP’s channel has been leading the big index this year.

That’s not a huge surprise. S&P 500 components tend to correlate very highly with the rest of the index, so CNP’s status as a member stock means that it’s going to tend to move broadly alongside “stocks” as a group.

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CNP has tested trend line support quite a few times since the late summer (evidenced by all of those blue arrows), but the channel has managed to hold up. That’s a very good thing for longs – it means that CNP can still catch a bid at support as buyers start to think, “hey, that looks cheap again!”

The best time to buy a stock that’s in an uptrending channel comes at support -- it’s the place where shares have the furthest to move back up to resistance (the top of the channel) and where they have the least distance to move through support. Since a breakdown below support means that the channel is broken, it’s also a logical place to put a stop below; that means minimal risk. With CNP up around the channel’s midpoint, opportunistic buyers would be well advised to wait a little while before jumping in.

 

The 50-day moving average is acting as a good proxy for support here, so I’d recommend placing a protective stop under it to reduce the risks if support does ultimately fail.

Bank of America

Bank of America (BAC) got plenty of traders’ attention yesterday, after just barely eking out a profit for the third quarter. While the earnings news had a big effect on the headlines, it’s not having a huge effect on share prices. For that, the technicals are reigning right now. Back in late July, I pointed out the bullish double bottom setup in shares, recommending buying shares on a move above $8.25.

Since then, shares have climbed 14% -- but a short-term setup points to more upside in this volatile big bank.

BofA is forming a short-term ascending triangle pattern right now, formed by a horizontal resistance level at $9.70 and uptrending support below shares. Essentially, as Bank of American bounces in between those two price lines, it’s getting squeezed closer and closer to a breakout above that $9.70 resistance level. When that happens, we’ve got a buy signal in shares.

This pattern is coming at an important time for BofA: the double-bottom that we’d watched this summer reached its price target, so this ascending triangle indicates that the rally isn’t over for this stock. An uptrend in RSI that’s still in force adds to confidence in this trade. It means that price is still increasing at an increasing level. If you decide to be a buyer here, it’s crucial to wait for $9.70 to get broken before buying.

Netflix

It’s been a rough year for Netflix (NFLX) in 2012 -- shares of the video content firm have dropped almost 36% in the last six months. But NFLX could finally be finding a bottom. Here’s how to trade it.

The bottoming setup in play here is the exact same one that shoved Bank of America 14% higher at the end of the summer: the double bottom. Netflix made two swing bottoms around $55, separated by a swing high at $65. That $65 level was the breakout level for NFLX, and it triggered last week. Since then, shares of the firm have been consolidating sideways as investors weigh their options on where to go from here.

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In real terms, the double bottom indicates exhaustion among sellers. At $55, buyers are significantly more eager to jump in and buy then sellers are to keep selling, a fact that’s evidenced by NFLX’s ability to make two swing lows at approximately the same price. Buyers regained control after the second bottom, which is why shares were able to break out. Still I’d be cautious about this stock – Netflix hasn’t exactly been a bastion of strength of late. The consolidation isn’t a bad thing, but I’d wait for a close above the dashed trendline resistance level before buying.

As always keep a tight stop if you decide to be a buyer here. Netflix’s volatility means that it could snap higher quickly, but buyers could drop again out just as fast.

Xerox

Last up is Xerox (XRX) the $10 billion IT and document solutions firm that’s achieved household name status. Like Netflix, shares of Xerox have been atrophying over the last year or so, dropping around 8% since the first trading day of 2012. But also like Netflix, this stock is showing traders a setup that could turn the decline around.

The pattern in Xerox is an inverse head and shoulders, a pattern that’s formed by three swing lows in a stock’s price chart. The outside two, the shoulders, come in at approximately the same level, and they’re separated by the head, a lower trough in the pattern. The buy signal comes when the neckline gets broken. While XRX’s neckline is sloped, it’s positioned at approximately $7.80 right now.

The inverse head and shoulders is a well-known pattern that tends to be a very reliable setup in spite of (or maybe because of) its popularity: a recent academic study conducted by the Federal Reserve Board of New York found that the results of 10,000 computer-simulated head-and-shoulders trades resulted in “profits [that] would have been both statistically and economically significant.”

Don’t buy until the neckline gets taken out. XRX is still in a downtrend until then.

To see this week’s trades in action, check out the High Volume Technicals for the Week portfolio on Stockpickr.

-- Written by Jonas Elmerraji in Baltimore.

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At the time of publication, author had no positions in stocks mentioned.

Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.