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BALTIMORE (Stockpickr) -- Don’t stress out about your portfolio just yet -- this isn’t as exciting a week for stocks as all of the Cyprus and Fed news would have you believe.
In fact, the S&P 500 is currently staging the most tepid correction it’s seen since November, drooping lower in three sessions before getting scooped back up by eager equity buyers. While this latest short-term correction isn’t over until the big index shoves its way above 1,563, we’re hardly on the edge of the precipice and looking down. The broad market’s rally is still looking extremely orderly right now, and this week’s price action is a necessary step to keep the rally rolling on.
While the price action in the S&P 500 isn’t exactly nail-biting, there are some more exciting setups shaping up in its constituent stocks -- so that’s what we’re focusing on today. As usual, 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.
Up first is Diageo (DEO), a stock that I talked about in last week’s column. Diageo has spent the last several months bouncing within an ascending triangle pattern, and now this week’s confirmed breakout is making DEO worth a second look.
The ascending triangle pattern is a bullish setup that’s formed by horizontal resistance above shares and uptrending support below shares. As DEO bounced within the channel, it was getting squeezed closer and closer to a breakout above that $120 resistance level. When the move finally happened, it triggered our buy signal in this stock.
Because Diageo had seen a false breakout earlier in the month, waiting for confirmation (in the form of holding the breakout for more than one trading session) was critical. Now looks like a good time to be a buyer in DEO. If you decide to jump in here, I’d still recommend keeping a a protective stop at the 50-day moving average.
$41 billion Chinese telco China Telecom (CHA) is the largest fixed-line operator in the People’s Republic and one of the country’s largest broadband and mobile service carriers. But that scale isn’t sparing CHA from the bearish technical setup that’s been forming in shares.
Right now, CHA is forming a descending triangle, the bearish counterpart to the ascending triangle pattern that’s signaling a buy in Diageo right now. The descending triangle is formed by a horizontal support level that acts as a sort of floor for shares and a downtrending resistance level pushing lower overhead. The breakdown below support -- at $51 for CHA -- is the sell (or short) signal for shares.
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 support level at $51 is a place where a glut of buyers has been willing to step in and put a floor in the stock. The breakout means that increasingly eager sellers have absorbed all of the excess demand for shares sitting at that level -- and without that barrier in place, shares could drop much further than that. I wouldn’t recommend owning CHA if $51 gets taken out.
It’s been a great year for shares of Berkshire Hathaway (BRK.B). Shares of the mammoth conglomerate have rallied more than 14% in 2013, besting the broad market by a wide margin. And now it looks like we’re approaching a good buying opportunity for Warren Buffett’s firm.
You don’t need to be an expert technical analyst to see what’s going on in Berkshire’s chart. In fact, Buffett himself could probably figure it out. The $250 billion stock has been trading within an uptrending price channel since November’s broad market bottom.
That price channel gives traders a high probability range for Berkshire’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 trendline support; it’s a level at which Berkshire has been able to consistently catch a bid. And now shares are testing that critical level once again.
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). Wait for the bounce in Berkshire before you decide to put your money on this trade.
Chipotle Mexican Grill
We’re seeing the exact same setup in shares of fast-casual Mexican restaurant chain Chipotle Mexican Grill (CMG). Chipotle has climbed 30% since its own bottom in November, and like Berkshire, shares are testing an important support level this week.
One big difference in Chipotle’s stock is the fact that it looks like this stock’s price is actually bouncing off of support here. Yesterday’s white candle didn’t merely hug the trend line like Berkshire’s did, and that’s providing a buy signal.
If we see continuation in today’s market session, I’d recommend putting on a position in this stock. 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.
Last, but certainly not least, is Apple (AAPL). The tech giant has been the stock everyone loves to hate in the last six months and change, but early signs show that the selloff could finally be coming to an end.
Apple’s selling hasn’t quite been the panicked frenzy to unload shares that many investors feel it has. Instead, the decline in Apple’s share price has actually been pretty orderly. Shares have been held lower by a strong trend line resistance level since late September, but this week’s breakout above resistance is signaling a change in trend.
Since the 50-day moving average has been a pretty good proxy for resistance since October, I’d still recommend waiting to see a move above the 50-day before putting cash back into this stock. The higher confirmation level will mean ceding a few points of possible gains, but it’ll also dramatically reduce the risks of getting caught in a bull trap. Momentum, measured by 14-day RSI, is adding some extra confidence to a bullish signal in AAPL -- it broke its own long-term downtrend last week.
If you’re looking for a bargain entry in Apple, a move through the 50-day is a reasonable way to get in with minimized risk. Just be sure to keep a tight stop in place if you don’t want to own shares longer-term.
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.