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5 Big Stocks to Trade as S&P Tests Record Highs - views
BALTIMORE (Stockpickr) -- It’s a big day for stocks, whether it feels like one or not. Thanks to tomorrow’s Good Friday’s market reprieve, today is the last market session in March, and more important, the final trading day of the first quarter.
As I write, the S&P 500 also happens to be within 0.15% of hitting its all-time closing high from back in 2007 -- we’re talking a measly 2.3 points in the big index, here. That means that equity prices are practically a rounding error away from ending higher than they’ve ever been before. If that doesn’t make today a potentially big day for stocks, nothing does.
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
Up first is the SPDR S&P 500 ETF (SPY). This $128 billion exchange-traded fund is a stellar proxy for the broad market, so as SPY goes, so go other stocks too. I’ve been saying for a while that the rally in 2013 has been orderly -- a quick look at SPY’s chart shows what I mean.
SPY has been trading higher in a trend channel since shares made a swing low in November. Even though this fund has seen some big corrections, trend line support has acted as a price floor for this ETF the entire time. That’s a very good thing because it gives us a high-probability trading range for shares. SPY is consolidating right now, churning sideways as it burns off some overbought momentum, but buyers have been building strength in the last few weeks.
One key difference between SPY and the S&P 500 index itself is that SPY has already made new record highs. That’s largely because SPY, unlike the S&P, is directly investible. That indicates that buyers are still willing to step in and pick up equities at new, higher levels. As SPY nears the low end of its trading range, investors should be looking to buy the dips.
I said that as SPY goes, so go other stocks too -- and Google (GOOG) demonstrates my point. While the degree of Google’s price action has varied from SPY a bit, it’s clear that the uptrending channel is keeping the search engine giant’s shares in check too.
That price channel gives traders a high-probability range for GOOG’s price action to stay within. Now Google’s shares are testing support at that critical trendline level. When you’re looking to buy a stock within a trend channel, buying after a bounce off of support 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). Wait for the bounce in GOOG before you decide to put your money on this trade.
Momentum, measured by Google’s 14-day RSI line, has been adding some bullish confirmation to this setup for the past few months. RSI has remained in an uptrend through all of GOOG’s corrections this year, and that uptrend is remaining intact now. Since momentum is a leading indicator of price, that’s a very good sign for Google bulls.
Fomento Economico Mexicano
It’s been a stellar year for Fomento Economico Mexicano (FMX), the $200 billion beverage stock better known as FEMSA. Shares have rallied more than 46% in the trailing 12 months alone. That strong price performance has been the result of the exact same uptrending channel that we’re seeing in Google and the broad market right now.
FMX bounced hard off of trend line support earlier this week, indicating to waiting buyers that this stock can indeed still catch a bid at those lower levels. While shares have moved up a fair amount since that bounce happened, this still marks a lower-risk entry level for longer-term traders who plan on keeping shares for this stock’s next few oscillations.
International markets have been correcting lately, so if you do take a position in FMX, use a tight stop.
Pentair (PNR) is another name that’s seen some impressive price appreciation in the last six months. Shares of this water pump manufacturer have climbed 18% and change in the last half-year. Now the technical setup in shares of this stock points to even more upside in the second quarter of 2013.
That’s because Pentair is currently forming an ascending triangle pattern, a bullish breakout trade that’s formed by a horizontal resistance level above shares (in this case at $54) and uptrending support to the downside. Essentially, as PTR bounces in between those two technically-important price levels, it’s getting squeezed closer and closer to a breakout above $54.
When that move through resistance happens, traders have a buy signal in this stock. Don’t try to get in early on this setup. Until the breakout happens, there isn’t a high probability trade here.
Last up is United Rentals (URI), a stock that’s showing traders the exact same ascending triangle setup as the one in PNR. URI’s horizontal resistance level at $56 is the price barrier that needs to get broken before we have the signal to enter a trade in this stock.
With any technical pattern, it’s critical to think in terms of buyers and sellers -- not shapes. After all, triangles, head and shoulders patterns 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 $56 is a place where a glut of sellers has been willing to step in and put a ceiling in the stock. A breakout means that increasingly eager buyers have absorbed all of the excess supply for shares sitting at that level -- and without that barrier in place, shares have room to rally to the upside. That’s why it makes sense to wait for the breakout before buying this stock.
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.