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5 Big Trades You Can't Miss This Week - views
BALTIMORE (Stockpickr) -- It's been a boring week for the broad market. Since Monday's open, the S&P 500 has managed to budge a whopping 0.31%. But while the S&P's price action may not be particularly exciting, the big index is still in make-or-break mode this week.
That's right, after correcting 3.7% from all-time highs, the S&P is sitting right above its trendline support level this morning. And despite the growing volume of the growls being thrown around by the bears right now, that's a bullish signal. Looking back over the course of this long-term rally, being a buyer at support would have been a lucrative trade all the way up.
So as the S&P sits just above its trendline for an eighth time now, investors should be getting ready to hit the "buy" button -- not the sell button. Caveat venditor.
That's why we're taking a closer look at the technical trades shaping up in five of Wall Street's biggest names this week. After all, while the major averages have posted pretty boring performance lately, there's some major movement going on in individual 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 this week.
Bank of New York Mellon
First up is Bank of New York Mellon (BK), a $34 billion banking name that's posted some strong performance numbers in 2013. BK has rallied nearly 18% since the start of the year, just barely edging out the S&P over that same period. And now shares are lining up very closely with the big index's uptrend.
You don't have to be an expert technical analyst to figure out what's going on in BNY Mellon -- a glance at the chart should do just fine. That's because BK has been in a textbook uptrend since last fall, bouncing higher all the way up in a well-defined range. While shares aren't as close to trendline support in BK as they are in the S&P, this big bank is getting there. The ideal time to be a buyer comes on a bounce off of that trendline support level.
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 you decide to jump in, I'd recommend keeping a protective stop above the 200-day moving average.
Toyota Motors (TM) is another name that's been benefitting from some upward momentum in 2013, only more so: Shares of TM have rallied close to 32% since the calendar flipped over to January. And now, this Japanese automaker looks well positioned for even higher ground by the end of the year.
That's because TM is currently forming an ascending triangle pattern, a price setup that's formed by a horizontal resistance level above shares at $130 and uptrending support to the downside. Basically, as TM bounces in between those two technically significant levels, it's getting squeezed closer and closer to a breakout above resistance. When that breakout above $130 happens, we've out our buy signal.
At first glance, Toyota's chart looks abnormally "gappy". Those gaps, called suspension gaps, are caused by off-hours trading of Toyota's shares in Tokyo and London -- they can be ignored for technical purposes. The 50-day moving average has been a reasonably good proxy for support all the way up; I'd recommend keeping a protective stop right underneath it.
$190 billion drug maker Pfizer (PFE) is another name that's forming a triangle pattern, only in PFE's case it's not a bullish one. That's because the pharma giant is forming a descending triangle, the bearish opposite of the setup that's shaping up in Toyota. Here's how to trade it.
The descending triangle in Pfizer is formed by horizontal support at $27 and downtrending resistance to the upside. Basically, a drop below that $27 price floor signals that this stock can't catch a bid, and it's time to sell -- or short -- shares of PFE.
Whenever you're looking at any technical price pattern, it's critical to think in terms of buyers and sellers. Triangles, channels, 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 support line at $27, for example, is a price where there is an excess of demand of shares; in other words, it's a place where buyers had been more eager to jump in and buy at lower price levels than sellers were to sell. That's what makes a move below it so significant -- the breakout tells us that sellers are finally strong enough to absorb all of the excess demand below that price level. Don't hang onto PFE after that happens.
Johnson & Johnson
Another pharmaceutical name that's looking bearish right now is Johnson & Johnson (JNJ). The blue-chip health care company is starting to look "toppy" thanks to a head and shoulders pattern that's starting to show itself in the long-term. From here, the price level to watch is $82.
The head and shoulders is a bearish reversal pattern that indicates exhaustion among buyers. The pattern is formed by two swing highs that top out around the same level (the shoulders), separated by a bigger peak called the head; the sell signal comes on the breakdown below the pattern's "neckline" level, which is right at that $82 price level. Until then, it's not a high probability trade yet.
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." That's reason enough to keep a close eye on that $82 neckline.
Last, but certainly not least, is search engine giant Google (GOOG), a stock that's looking markedly more bullish than Johnson or Pfizer right now. In fact, Google looks a whole lot more attractive than most of the tech sector in 2013, rallying almost 27% year-to-date while other big tech names have floundered. So, how do you trade it?
After rallying hard in the first quarter and a half, Google has spent the last few months consolidating sideways in a rectangle pattern. That's not uncommon, especially after a big move. With GOOG's shares up so much since the start of the year, a period of sideways price action gives shareholders a chance to figure out their next moves.
The rectangle pattern gets its name gets its name because it basically "boxes in" shares of a stock. The time to be a buyer comes when GOOG exits its box to the upside: more specifically, a move above resistance at $920. Momentum adds some extra confirmation to Google's upside bias -- 14-day RSI broke its mid-term downtrend at the start of this week, pointing to higher levels for GOOG.
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