- Must-See Charts: How to Trade Toyota, Caterpillar, PetroChina, Discover, Thermo Fisher
- 5 Stocks Under $10 Making Big Moves Higher
- 4 Big Stocks to Trade (or Not)
- 3 Huge Stocks on Traders' Radars
- 5 Stocks With Big Insider Buying
5 Breakout Stock Trades for a Santa Claus Rally - views
BALTIMORE (Stockpickr) -- Kris Kringle may have more in common with Gordon Gekko than you think. After all, jolly old Saint Nick is the one who has a stock market phenomenon named after him.
The Santa Claus rally is technically the buying pressure in the truncated trading sessions between Christmas and New Year's Day -- but let's not get too technical over a price move named after Santa. In the last few years, investors have used the Santa Claus rally to refer to the stock market's historical bullish seasonality during the entire month of December.
So with December upon us, it makes sense to take a look at the price setups best-positioned to take advantage of a last-minute surge in stocks. To do that, we'll take a technical look at trades to be made in five names this month.
For the unfamiliar, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
Without further ado, let's take a look at five technical setups worth trading now.
Select Medical Holdings
2013 has been a pretty poor year for shareholders of Select Medical Holdings (SEM). Shares of the billion-dollar health care facilities stock have fallen around 10% since the calendar flipped over to January. That means that SEM is underperforming the S&P 500 by more than 36% year-to-date. But investors could be in store for a reprieve thanks to the bullish setup that's been forming in shares.
SEM is currently forming an ascending triangle bottom, a bullish setup that's formed by a horizontal resistance level above shares at $9 and uptrending support to the downside. Basically, as shares of Select bounce in between those two technically-important levels, they're getting squeezed closer and closer to a breakout above our $9 price ceiling. When that happens, we've got a buy signal in shares.
Select Medical broke its downtrend back in the summer, but $9 has held firm as resistance ever since. One potential early indicator of a breakout is going to be momentum: 14-day RSI has hit its head on 70 the last couple times SEM hit its head on $9. A breakout above 70 on the momentum gauge is likely to lead the price breakout.
Heavy agricultural and construction equipment manufacturer Deere (DE) is showing the exact same setup as Select Medical. Like the other name, Deere has been a serial underperformer in 2013, failing to clear higher ground while pretty much every other major equity name pushed to new highs. But an ascending triangle setup holds promise for Deere, even if the setup is a little sloppier than the one in SEM. The trading implications are exactly the same.
Resistance is in play at $85 in Deere -- a move above that price level is the buy signal.
Whenever you're looking at any technical price pattern, it's critical to think in terms of those buyers and sellers. Rectangles, triangles and other pattern names 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 $85 resistance level is a price where there has been an excess of supply of shares; in other words, it's a place where sellers have been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above it so significant the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Don't be early on this trade.
Things are a little simpler in shares of CGI Group (GIB), an $11 billion Canadian IT services firm. You don't have to be an expert technical analyst to figure out what's going on in this stock. In fact, a quick glance at the chart will do.
That's because GIB is currently forming an uptrending channel. The pattern is just about as basic as it gets: a pair of parallel trendlines have been reigning in GIB's price action for all of 2013, bouncing shares higher all the way up. Those two price levels give traders a high-probability price range for shares of GIB, and as you might imagine, it makes sense to jump in close to trendline support.
Since GIB is currently in the middle of the price channel, it's still got a little downside room to push into before it becomes buyable. But shares are on their way down now, so it makes sense to keep this name on your radar. When the time comes to buy, keep a protective stopjust below the most recent swing low at $33.
Willis Group Holdings
$11 billion UK insurer Willis Group Holdings (WSH) is another uptrending channel. The big difference with Willis is that this name is actually at its trendline support level this week. Better still, shares are bouncing higher -- and it makes sense to buy the bounce here.
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, you're ensuring WSH can actually still catch a bid along that line.
The 50-day moving average has been a good proxy for support on the way up, so it's a solid place to put a protective stop if you decide to be a buyer at this point.
Integrys Energy Group
Last up is Integrys Energy Group (TEG), the sole downside name we're looking at this week. Even though December is historically a great month to own stocks, that doesn't mean that it's universally a great month to own all stocks. And TEG looks "toppy" at this point.
Integrys is currently forming a head and shoulders top, a bearish setup that indicates exhaustion among buyers. The pattern is formed by two swing highs that hit their head around the same level (the shoulders), separated by a higher high (the head). The sell signal comes on a move through the neckline, which is currently sloping through $52. TEG is actually a "nested" pattern, which means that the right shoulder is a complete head and shoudlers pattern itself on a shorter-timeframe. Since the downside has already triggered on the right shoulder, we should expect a test of the longer-term neckline soon.
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 good reason to keep this stock in your crosshairs in the days ahead; a break below the neckline is a short signal.
To see this week's trades in action, check out the Technical Setups for the Week 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