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5 Big Trades for a September Bounce - views
BALTIMORE (Stockpickr) -- The broad market bounced hard yesterday, providing a glimmer of hope that August's lackluster price action isn't carrying over to September. Maybe one single month is just what passes for "summer doldrums" in 2013. Eh, maybe.
One thing's for sure: Wednesday's 0.81% bounce higher was the biggest one-day move for the S&P 500 in more than a month. Yup, investors' willingness to shrug off drama in Syria, tepid global growth numbers and the ongoing talk of a taper from the Fed looks promising.
But some individual names look more promising than others. That's why today, we're taking 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.
SPDR S&P 500 ETF
It hasn't been long since we last took a look at the SPDR S&P 500 ETF (SPY) -- we dug into this chart just last week. At the time, we were waiting for a bounce: "So with SPY testing its price floor again now, it makes sense to buy early signs of a bounce."
Well, we got our bounce yesterday. And it's making today's price action buyable. Just to be clear, a bounce in the broad market doesn't guarantee that the S&P is going to make new highs in September, but it does make higher ground a high-probability trade.
Relative strength adds some extra confidence to the notion that buyers are starting to step back into stocks. While SPY is supposed to track the S&P 500 index very closely (in a perfect world, that relative strength line below the price chart should be flat), the uptrend suggests that investors are trying to go overweight into equities as a group even while some of the biggest names on the market continue to perform poorly. SPY, after all, is one of the easiest ways to go "long the market," so when it sees positive relative strength versus the S&P, it's a constructive signal for stock prices.
Investors who aren't building an equity position right now may soon wish that they had been.
We're seeing similar price action in Google (GOOG) right now. Like the S&P 500, the search engine giant is testing trendline support this week -- and you don't have to be an expert technical analyst to see why. GOOG's chart is a textbook example of an uptrend.
Google caught a strong bid yesterday, pushing off of the trendline that's been in place since the beginning of the year. And generally speaking, it makes sense to buy 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).
In Google's case, I'd recommend waiting for the near-term correction (marked by the red dashed line in the chart above) to get knocked out before jumping into GOOG. A close above that red downtrend line is a buy signal. Then, I'd recommend keeping a protective stop in place at $840.
2013 has been a stellar year for shares of SLM Holding (SLM), the education lender better known as Sallie Mae. SLM has rallied more than 41% since the calendar flipped over to January, outperforming the S&P's climb higher by an impressive margin. And now, a bullish setup in shares points to even higher levels this fall.
SLM is currently forming an ascending triangle pattern, a bullish setup that's formed by horizontal resistance above shares at $25 and an uptrending support level below shares. Basically, as SLM bounces in between those two technical levels, it's getting squeezed closer and closer to a breakout above $25. When that happens, we've got a buy signal in this stock.
The steep uptrend in relative strength (below the price chart) is an important indicator for SLM buyers right now. Since the uptrend has remained intact despite the S&P's August correction, we know that SLM has consistently outperformed the big index. That statistically points to continued outperformance over a three-to-ten month time horizon.
Translation: buy SLM above $25.
Big insurer ABB (ABB) is another stock that's showing traders an ascending triangle setup. In the case of this name, resistance is at $23 and uptrending support has been intact since back in February. When shares can finally push through $23, traders have their buy singal.
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 $23, for example, is a price where there is 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 are to buy. That's what makes the move above it so significant -- the breakout indicates that buyers are finally strong enough to absorb all of the excess supply above that price level.
Don't buy ABB until it can catch a bid above $23.
Last up is China Mobile (CHL), the largest phone carrier in the People's Republic. CHL has spent most of 2013 getting dragged sideways -- shares are about 6% lower today than they were at the start of the year. But China Mobile's trend could be coming to an end thanks to a bullish setup in shares this month.
CHL is currently forming an inverse head and shoulders setup, a bullish reversal pattern that indicates exhaustion among sellers. The inverse head and shoulders is formed by two swing lows that bottom out at approximately the same price level (the shoulders), separated by a deeper swing low (the head). The buy signal came on Wednesday when shares broke through the pattern's neckline at $54. That makes this name buyable today.
Strong momentum adds some extra emphasis on yesterday's breakout -- 14-day RSI has been in an uptrend since the middle of the summer. If you decide to be a buyer from here, make sure you keep a protective stop nearby.
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