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5 Big Trades for a Ping-Pong Market - views
BALTIMORE (Stockpickr) -- If it feels like Mr. Market has been here before, it's because he has. Stocks are inmake-or-break mode for a second Thursday in a row, after bouncing hard at the end of last week. The S&P 500 and the Dow Jones Industrial Average are both touching key support levels this morning.
Nothing like a little bit of drama to keep investors interested in the most hated rally in history, right?
This is a "ping-pong market." Stocks have been bouncing off of support and resistance levels all the way up, and investors are getting trading opportunities all the while. So today we'll take a look at five new technical trades heating up in five huge stocks.
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.
First up is Chevron (CVX), the $323 billion oil and gas supermajor. Chevron gets top billing today because it's had the highest correlation with the S&P 500 lately -- an unlikely pair given Chevron's hefty commodity exposure. But just like the broad market, Chevron is testing trendline support today, and there's a trade to be made in shares.
You don't have to be an expert technical analyst to figure out what's going on in shares of Chevron. The energy giant has been in an uptrend since mid-November (like the broad market), bouncing between well-defined trendline support and resistance levels all the way up. The ideal time to buy a stock in an uptrend is on a bounce off of support -- that's because trendline support is the spot where shares have the highest upside potential and the spot where downside risk (that is, how much you have to lose before you know you're wrong on the trade) is the smallest.
Notice that I said that it makes sense to buy on the bounce. Trendlines do eventually fail, so waiting for Chevron to actually bounce off of support confirms that shares can still catch a bid at that level. Yes, waiting does mean that you sacrifice some small upside, but it also materially increases the probability of a winning trade.
Pfizer (PFE), on the other hand, is a good example of what happens when a stock falls through trendline support. The pharma giant spent most of 2013 in an uptrend, climbing around 24% from the first trading session in January until the end of April. But the break below support in mid-May signaled that PFE was due for lower levels.
Now Pfizer is testing trendline resistance, bumping up against the upper-end of a downtrending channel after rallying for a handful of days when the broad market failed to. That sounds like a selling opportunity for all of the reasons that Chevron's chart is a buy.
But PFE gets the same caveat that CVX does before it makes sense to put real money on the line: Wait for a bounce. The 50-day moving average is right above the top of the channel on Chevron's chart; that's where I'd recommend keeping a protective stop.
There's no question that 2013 has been a good year for Wells Fargo (WFC). Year-to-date, shares of the big bank are up 18%. But it could be getting even better for investors.
That's because Wells is currently forming an ascending triangle pattern, a bullish setup that's formed by a horizontal resistance level above shares and uptrending support to the downside. Essentially, as WFC bounces in between those two technical price levels, it's getting squeezed closer and closer to a breakout above resistance at $41.50. When the breakout happens, we have our buy signal.
The financial sector, and Wells Fargo in particular, has shown outsized relative strength over the course of the last month and change. From a statistical perspective, positive relative strength trends tend to signal outperformance over the next three to ten months. That bodes well for Wells Fargo owners right now.
Don't be early on this trade. Wait for $41.50 to get taken out before jumping in.
Apple (AAPL) is in unfamiliar territory right now. That's because it's not a bearish setup to watch this week. Instead, Wall Street's most-hated tech stock is actually showing signs of a reversal in shares. Here's how to trade it.
Right now, Apple is forming an inverse head and shoulders pattern, a bottoming formation that indicates exhaustion among sellers. After the 20% capitulation in shares this year (that's 35% market underperformance, mind you), it's no surprise that sellers are getting a bit exhausted at this point. The inverse head and shoulders is formed by two swing lows that bottom out at approximately the same level (shoulders), separated by a deeper trough between them (the head). The buy signal comes on a breakout trade above the neckline, currently at $460.
From a momentum standpoint, the uptrend in 14-day RSI still looks constructive. Despite a dip below the trendline on AAPL's April selling, the uptrend resumed quickly. Since momentum is a leading indicator of price, that's a good signal. I'd still recommend keeping a tight stop in place if you're anything but a super-convicted buyer here. The 50-day moving average has been a good proxy for support; I'd put a stop just below it.
Johnson & Johnson
The exact opposite pattern is shaping up in shares of Johnson & Johnson (JNJ) right now. This pattern is basically the setup in Apple, but flipped upside down.
JNJ is forming a head and shoulders top, with a neckline in place at the $83.50 level. A breakdown below that price is a sell (or short) signal for shares of JNJ. It's no coincidence that JNJ has hefty pharmaceutical exposure, much like our other bearish trade, Pfizer. As an industry, pharma is looking weak technically, and the setup in JNJ makes that weakness tradable. If and when this trade triggers, it activates a downside target at $79.
Whenever you're looking at any technical price pattern, it's critical to think in terms of buyers and sellers. After all, triangles, channels and head and shoulders patterns 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.
JNJ's neckline level at $83.50, for instance, is a place where buyers have previously been more eager to buy on the dip than sellers have been to keep taking gains on shares. A move through that $83.50 level indicates that sellers have gained enough steam to absorb all of the excess demand there. That's what makes it a sell signal.
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.