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BALTIMORE (Stockpickr) -- As the first trading session kicks off for August, investors are finally getting a taste of summer doldrums.
Stocks have been trading sideways for the past couple of weeks now, after rallying more than 5% from July 1. That horizontal price action isn't necessarily a bad thing, though. After a big move like we've just experienced, consolidation periods give markets a chance to take a breath. They're healthy for rallies.
Historically, summer is the time of the year when the stock market is on snooze. And since that hasn't been the case so far this summer, we're overdue for some dull trading. But just because the broad market is range-bound doesn't mean that all stocks are nodding off. Sure enough, there are still some tradable setups shaping up in a handful of Wall Street's biggest names this week.
Today, we'll take a technical look at five of them.
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 five high-volume stocks to trade this week.
Diesel engine maker Cummins (CMI) has posted reasonably perfunctory performance year-to-date, climbing 11.75% since the calendar flipped over to January. But zoom out a bit more, and CMI's rally from October looks a whole lot more impressive: Shares are up 38% since Oct. 11.
Now this stock looks well-positioned for another big leg higher.
Cummins is currently in the process of forming a long-term ascending triangle pattern, a price setup that's formed by horizontal resistance above shares at $121 and uptrending support to the downside. Essentially, as CMI bounces in between those two technical levels, it's been getting squeezed closer and closer to a breakout above that resistance price. When that breakout happens, we've got a buy signal for shares.
Arthur J. Gallagher
We're seeing the same exact price setup in shares of mid-cap insurance broker Arthur J. Gallagher (AJG) -- just in the shorter-term. AJG has been forming an ascending triangle setup of its own since the beginning of May, hitting its head on resistance at $45.50. That's the breakout level to watch in shares this week.
Whenever you're looking at any technical price pattern, it's critical to think in terms of buyers and sellers. Ascending triangles and other price pattern names are a good quick way to explain what's going on in this stock, but they're not the reason it's tradable. Instead, it all comes down to supply and demand for shares.
That resistance line at $45.50 is a price where there's an excess of supply of shares; in other words, it's a place where sellers have been more eager to take recent gains and sell their shares than buyers have been to buy. That's what makes the move above it so significant -- a breakout indicates that buyers are finally strong enough to absorb all of the excess supply above that price level. Wait for that signal to happen before you jump into this stock.
Procter & Gamble
Consumer products behemoth Procter & Gamble (PG) is another name that's hitting its head on resistance right now, but this stock chart carries some very different trading implications right now. That's because Procter's resistance is matched on the downside by downtrending support, forming a setup called a "broadening pattern."
Broadening patterns indicate increasing volatility in a stock. The lower series of lows tells us that sellers at holding their ground at $63 and buyers are getting beaten down to decreasing prices as time goes on. Those aren't signs you want to see in a stock you own.
Statistically, broadening patterns tend to resolve to the downside. That means that we're more likely to see PG shove through that dropping support line than we are to see it crack resistance at $81.50. That said, with shares testing resistance this week, we could see this pattern get broken if buyers suddenly crank up their eagerness to own PG. It makes sense to sit on the sidelines until that happens.
You don't have to be an expert technical analyst to figure out what's going on in shares of Berkshire Hathaway (BRK.B) -- this big conglomerate has been in a textbook uptrend since the start of 2013. That's propelled shares of the $287 billion firm by more than 30% year-to-date, nearly doubling the broad market's gains over the same period.
Now Berkshire's channel higher is pointing towards an end to the recent churning in shares.
Trendline support is strong in Berkshire Hathaway: this stock has bounced higher each of the last five times shares have tested the bottom of the channel. This week, with shares creeping closer and closer to support, it makes sense to be a buyer on the bounce. Buying off a support bounce 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).
If you decide to jump into Berkshire here, I'd recommend putting in a stop on the other side of the 50-day moving average; it's been a good proxy for support in the last few months.
Last up is big bank JPMorgan Chase (JPM), a $211 billion name that's giving traders a second shot at a low-risk entry this week.
JPM spent most of this year looking bullish, buoyed by strength in the whole financial sector. There have been plenty of buying opportunities along the way, as JPM took pauses and then broke out above resistance levels -- the most recent came at $55. This week, shares are throwing back to that $55 level. It might not look like it at first glance, but that's a good thing.
A throwback happens when a stock moves back down to test newfound support at its former breakout level -- in this case at $55. And while throwbacks look ominous, they're actually constructive for stock prices because they re-verify the stock's ability to catch a bid at support. Wait for that bounce to signal safe waters before jumping in -- and when you do, keep a tight stop in place.
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. Follow Jonas on Twitter @JonasElmerraji