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5 Big Trades for Year-End Gains - views
BALTIMORE (Stockpickr) -- After a strong day of selling yesterday, the S&P 500 is down a "whopping" 1.3% in December. Not quite the bloodbath for stocks that it's been made out to be.
So even though stocks are pointed slightly lower this morning, it's a little premature to start panicking about the staying power of this rally.
Despite a fairly flat start to the month, history typically sits on the side of the bulls in December. In fact, it's worth noting that it's been more than five decades since a rally has ended during the final month of the calendar year. And sure enough, we're seeing some big trading opportunities starting to perk up in some of the most actively traded stocks on Wall Street. That's why we're taking a technical look at five big-name trades to take this week.
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.
Large-cap apparel stock PVH (PVH) is a perfect case in point. While PVH's 18% rally would be stellar performance during a normal year, 2013 has been anything but normal for stock investors, so shares have actually underperformed the broad market by 8.3% since the calendar flipped over to January. But the price action in PVH points to shares making up the difference.
PVH is currently forming a cup and handle pattern, a classic bullish price setup that's formed by a cup-shaped rounding bottom in shares that's followed up by a short-duration channel down. The buy signal comes on a move through the pattern's price ceiling at $135. Since PVH is testing that $135 resistance level this week, we could see a buy signal in PVH sooner rather than later.
Momentum adds some extra confidence to the setup in shares of PVH. That's because our momentum gauge, 14-day RSI, has been making higher lows since the bottom of the "cup" back in October. With momentum at a support level of its own this week, expect a bounce sooner rather than later.
LKQ (LKQ), on the other hand, hasn't been a slouch when it comes to market performance in 2013; shares of the $10 billion auto parts maker have climbed more than 57% since the start of this year. But it's premature to sell this stock -- the technicals point to more upside yet to come.
LKQ is currently forming a rectangle pattern, a consolidation setup that's formed by a horizontal resistance level above shares at $34 and horizontal support at $31. The rectangle gets its name because it basically "boxes in" shares of a stock -- the break outside of the box is the trade to take. So if LKQ pushes above $34, then it's time to buy.
Even though consolidation setups -- such as the rectangle in LKQ -- move price action sideways, they come with directional bias in tow. Since LKQ's price action leading up to the rectangle was bullish, it's more likely to break out from the setup to the upside. While it's close now, it doesn't become a high-probability trade until $34 gets taken out.
Discover Financial Services
You don't have to be an expert technical analyst to figure out what's going on in shares of Discover Financial Services (DFS). This payment network is showing off some pretty basic technical price action. DFS is currently trading higher in an uptrending channel, a setup formed by a pair of parallel trend lines. When it comes to price channels, up is good and down is bad; it's as simple as that.
For Discover, trend line support has spurred a price bounce in each of the last seven times it's been tested. With shares coming down for test number eight, it's likely we'll see another trend line bounce in December. That bounce is when you want to be a buyer -- not before.
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). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, we're ensuring Discover can actually still catch a bid along that line.
We're seeing the exact same price setup in shares of Mylan (MYL) right now. MYL has been one of the best-in-breed pharma stocks over the course of 2013, rallying more than 50% between January's first open and yesterday's close, and with shares approaching trendline support again, this stock looks primed for a bounce.
Mylan's channel has provided a high-probability range for this stock's price action all the way since the summer. In fact, it's been more than high-probability; it's been textbook over that time.
The 50-day moving average has been a stellar proxy for support all the way up Mylan's channel, so it's the perfect place to put a protective stop after the bounce in shares. Relative strength continues to be outsized in MYL right now that means that this stock is statistically more likely to continue to beat the S&P 500 for the next 10 months. Wait for the bounce off of support before you buy...
Not all of the names we're looking at today are bullish. Sorry Warren, but Berkshire Hathaway (BRK.B) is starting to look toppy right now.
Berkshire has been forming a long-term descending triangle for the last six months now. The descending triangle is formed by a downtrending resistance level above shares and a horizontal support level to the downside. Basically, as Berkshire bounces in between those two technically-important prices, it's getting squeezed closer and closer to a breakdown below support at $111. When that happens, it's time to be a seller.
Relative strength has been toxic since all the way back in July, bleeding off as Berkshire has continued to underperform the S&P. But the real sell signal comes on a move through $111.
Whenever you're looking at any technical price pattern, it's critical to think in terms of buyers and sellers. Triangles and the other setups we've looked at are a good quick way to explain what's going on in a stock, but they're not the reason it's tradable. Instead, it all comes down to supply and demand for shares.
That support level at $111 is a price where there had been an excess of demand of shares; in other words, it's a place where buyers were more eager to step in and buy shares at a lower price than sellers were to sell. That's what makes a breakdown below $111 so significant -- the move would indicate that sellers are finally strong enough to absorb all of the excess demand above that price level. Wait for that trigger before you sell.
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