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BALTIMORE (Stockpickr) All told, the S&P 500 has moved a whopping 0.22% since the start of August, hardly price action worth writing about. But while the magnitude of the S&P's move hasn't been noteworthy, the positioning of the battleground has been.
The big index is a mere 20 points away from the all-time highs posted on August 2. That's just 1.2% away from where the S&P stands today at 1,689. After two weeks of consolidating sideways, stocks don't have far to move before hitting another high-water mark and that could have some big implications for the staying power of this rally.
True, plenty of investors are calling for a top in stocks again here, but to paraphrase Mark Twain, the reports of the rally's end have been greatly exaggerated. That's why we're taking a look at five technical setups worth trading this week.
For the unfamiliar, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
So, without further ado, let's take a look at five technical setups worth trading now.
First up is Disney (DIS), a name that's churned out some stellar performance year-to-date: Since the calendar flipped over to January, shares of Disney are up close to 30%. And now the technical setup in shares of this $114 billion entertainment giant points to even higher ground in the second half of 2013.
Disney is forming an ascending triangle, a bullish pattern formed by a horizontal resistance level to the upside at $67 and uptrending support to the downside. Basically, as DIS bounces in between those two technical levels, it's getting squeezed closer and closer to a breakout above resistance. When that breakout happens, it's time to be a buyer.
The exact same setup is taking shape in Pool (POOL). The aptly named $2.5 billion swimming pool supply firm is forming an ascending triangle pattern of its own with resistance at $55 and uptrending support to the downside more or less in step with the 50-day moving average. Just like with Disney, POOL becomes a buy on a breakout above resistance at $55.
Whenever you're looking at any technical price pattern, it's critical to think in terms of buyers and sellers. 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 $55 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.
If one sector has been best-positioned to take advantage of the rally in stocks, it's been financials. For a number of reasons, buying the financial sector is like a leveraged bet on the broad market, so it's no surprise that $200 billion bank JPMorgan Chase (JPM) has turned out market-beating performance in 2013. And you don't have to be an expert technical analyst to figure out what's going on from here.
JPMorgan has been in a textbook uptrend since mid-November, bouncing off of support and resistance all the way up. That uptrending channel provides a high-probability range for JPM's price action on the way up. And while you want to be a buyer in an uptrend, the ideal time to buy comes on a bounce off of support.
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 JPM catches a bid here, I'd suggest going long.
UK-based bank Barclays (BCS) is another financial sector giant that's in a channel right now, just not with the same kind of upward mobility that U.S.-based financials have been enjoying. Instead, Barclays has been trading sideways in a price channel called a rectangle.
Rectangle patterns get their name because they basically "box-in" shares in between a horizontal resistance level to the upside and a horizontal support level that acts as a sort of price floor. Unlike the other patterns today, rectangles don't have quite as much directional bias. In other words, the ultimate direction of the trade is determined by the direction that BCS breaks out of its channel in.
With well-defined support below and resistance above, there are large pockets of supply and demand for Barclays' shares; traders will want to see one of those imbalances absorbed by the opposing side before taking a trade on shares of this stock. Buy on a move above $20; otherwise, sell a drop below $16.75.
Last up is Realogy Holdings (RLGY), a $7 billion real estate broker. Despite major tailwinds in the real estate space this summer, RLGY is looking toppy. Here's how to trade it.
RLGY is currently forming a head and shoulders top, a price pattern formed by two swing highs that top out at approximately the same level (shoulders), separated by a higher high between them (the head). The sell signal comes on a breakdown below the neckline, which is right at $44 for Realogy. Momentum adds some extra confidence to RLGY's downside setup -- 14-day RSI has been in a downtrend since February that steepened at the start of the summer.
Lest you think that the head and shoulders is too well known to be worth trading, the research suggests otherwise: 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." Keep an eye on that $44 neckline this week.
To see this week's trades in action, check out the Technical Setups for the Week 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
Follow Jonas on Twitter @JonasElmerraji