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BALTIMORE (Stockpickr) -- Mr. Market is in regroup mode this week, moving sideways after a push higher to just below all-time highs for the S&P 500. For its part, the Dow has been enjoying its new role plowing to new highs; the index of 30 blue-chip stocks hit new all-time highs again this week.
There are a couple of factors in this market that investors should be paying attention to. For starters, there’s still a lot of money sitting on the sidelines. A handful of retail investor surveys show around half of the investing public still waiting for an opportunity to get back into stocks. The lack of a spike in interest rates offers some extra evidence for that as well -- the mountain of cash sitting in treasuries isn’t exactly fleeing everyone’s “favorite” risk-off asset right now.
So while investor anxiety may be perking up a bit as stocks splash up into new high water marks, this rally is far from running out of steam. That fact could put a whole lot more upside ahead of us in 2013. That’s why today we’re taking a technical look at the price setups forming in five of the biggest names on Wall Street.
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 the charts of five high-volume stocks to trade for gains.
Shareholders of $75 billion alcoholic beverage stock Diageo (DEO) may want to get a toast to this stock’s price setup ready to go. While DEO has been consolidating sideways for the better part of 2013, zoom out a little further and the stock’s trading setup looks a whole lot more auspicious. It points to considerable extra upside for shares.
That’s because Diageo is currently forming an ascending triangle pattern, a price setup that’s formed by horizontal resistance above shares and an uptrending support level below them. Basically, as DEO bounces higher within its trend channel, it’s getting squeezed closer and closer to a breakout above resistance. That breakout above the $120 level is our buy signal for this stock.
It’s critical to wait for the breakout to be confirmed before piling in -- DEO pushed through $120 earlier this month only to settle back down within the channel. I’d recommend waiting for a close above $120 followed by a consecutive white bar candle open above it before putting cash on this trade. Then, keep a protective stop at the 50-day moving average.
Another breakout trade is shaping up in shares of large-cap drug maker Actavis (ACT). Actavis has been trading within a rectangle pattern for the last few months, bouncing between a horizontal resistance level above shares at $90 and a horizontal support level below shares down at $82.50. Yesterday’s push through resistance is sending a buy signal for traders today.
With any technical pattern, it’s critical to think in terms of buyers and sellers -- not shapes. After all, triangles, head and shoulders patterns and the like are a good way of describing what’s happening on a chart, but they’re not the reason why it’s tradable. Instead, that all comes down to the supply and demand caused by those buyers and sellers.
The horizontal resistance level at $90 is a place where a glut of sellers has been willing to step in and put a ceiling in the stock. The breakout means that increasingly eager buyers have absorbed all of the excess supply of shares sitting at that level -- and without that barrier in place, shares could rally much higher than that.
That’s why it makes sense to buy ACT now that sellers are nowhere to be found -- just keep a tight stop.
March & McLennan
You don’t have to be an expert technical analyst to spot what’s going on in shares of Marsh & McLennan (MMC). The $20 billion risk advisory firm has been trading within an uptrending price channel for the last few quarters.
That price channel gives traders a high probability range for MMC’s trading to remain within, a big advantage when trying to figure out what to do with this stock. The most important level to watch is trend line support; it’s a level where MMC has been able to catch a bid and reverse on its last nine drops, and it’s likely to remain an important downside barrier.
When you’re looking to buy a stock within a trend channel, buying after a bounce off of support 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).
The 50-day moving average has been a good proxy for support over the course of the pattern. That’s where I’d recommend putting a protective stop on this trade.
We’re seeing the exact same setup in shares of Swiss agri-chemical firm Syngenta (SYT). Like MMC, Syngenta has been trading within a tight trading range, bouncing off of trendline support seven times since June. While those drops to support may seem like a bad thing at first glance, they’re actually bullish. They indicate that SYT can easily catch a bid at support, a fact that makes the trendline a stronger level for traders.
Each of the arrows on the chart represents a thrust up off of support; it’s a move where buyers swept in to bid SYT higher after selling pressures brushed shares against their dynamic support level. Incidentally, those thrusts higher are the exact time you want to be a buyer in Syngenta.
You may notice that Syngenta’s chart looks “gappy” -- price action is filled with holes. Those gaps, called suspension gaps, are caused by off-hours trading in SYT on Zurich’s SIX Swiss Exchange. For technical trading purposes, they can be ignored.
The sole bearish setup we’re looking at today comes from UK-based bank HSBC Holdings (HBC). HSBC has enjoyed some impressive price performance in the last few months, buoyed by huge strength in the financial sector as a whole. But now, a topping pattern in this stock could mean the end to its run higher.
HSBC formed a double top in February, which broke down at the start of this month. The double top, formed by two swing highs that hit resistance at the same level, is a common sign that a change-in-trend is about to occur for a stock that’s been performing well. That said, I wouldn’t recommend being short HBC here. Shares have already reached their downside objective last week, and I think sideways churning is a more likely outcome. The breakdown level at $55 and change is likely to remain an important resistance price for shares in March.
With the broad market continuing to make new highs, you won’t want to short this stock here, but I wouldn’t recommend buying it either.
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.