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5 Huge Stocks to Trade in May - views
BALTIMORE (Stockpickr) -- Stocks took a welcome breather yesterday, dipping just under 1% after climbing higher for close to two weeks straight. A month ago, a 1% correction in the broad market would have been treated like a catastrophe, but now investors are shrugging it off. That’s a good thing for this rally’s staying power in May. More on that in a minute.
As of yesterday’s close, the S&P 500 is up 11% in 2013 -- and scores of investors who didn’t trust the rally coming into the new year think they’ve missed it. But that’s not necessarily true. While stocks have made some big moves this year, there’s still upside to this rally.
And some names are set to move more than most from here. So today we’ll take a technical look atfive big stocks worth trading in May.
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 for gains.
SPDR S&P 500 ETF
First, it’s worth taking an updated look at the SPDR S&P 500 ETF (SPY) today. SPY is a good proxy for the broad market -- the $130 billion ETF mirrors the S&P’s daily ebb and flow, giving investors a one-step way to buy stocks as a group. And lately, both the big index and this ETF have been looking extremely attractive from a technical standpoint.
It doesn’t take a whole lot of technical expertise to see where the prevailing trend is in this chart: It’s up. More importantly, that uptrend has stayed within a tight channel since all the way back in November. Even when the S&P tested support in mid-April, the index managed to catch a bid at that lower line and bounce higher again. In a word, this rally has been “orderly” -- and it continues to be orderly right now.
In a nutshell, this is still a “buy the dips” market.
By that, I mean that it’s continuing to pay off to buy SPY close to trend line support. That’ll change when the uptrend breaks and the 50-day moving average gets violated. Until that happens, keep buying the dips.
Not all of the S&P’s component stocks have been participating in the rally. In fact, Apple (AAPL), its biggest component, has been forming the opposite pattern since last October. But that could be about to change.
Apple’s downtrend has been every bit as orderly as the uptrend that the rest of the market has been enjoying. Each test of trend line resistance has sent supply flooding shares and pushed this big name back down into the channel -- until recently, that is. This week, AAPL is testing a breakout above resistance. That could mean an end to the selling in shares of the world’s biggest company.
Not so fast, though. Apple has tested resistance in the past only to get swatted lower. This won’t be a reversal until AAPL can start making higher lows (that’s requisite for an uptrend). We’ll get an early buy signal if Apple can catch a bid above its most recent swing high at $466. If AAPL can hold above that previous price ceiling, we’ve got a buy signal for more aggressive Apple bulls. Then I’d recommend keeping a protective stop on the other side of the 50-day moving average; it should start looking like a decent proxy for support when a move through $466 happens.
Wal-Mart (WMT) is taking a breather this week, consolidating sideways after a swift rally from the mid-$60s. Even though WMT’s recent price action hasn’t exactly been riveting lately, there’s still a trade to be made in this retail mammoth.
Wal-Mart’s price action has been constrained within a rectangle pattern since the uptrend turned sideways. A rectangle is a pattern that’s formed by two horizontal price levels: resistance above shares at $79 and support below at $77. Rectangles give traders a chance to catch their breath and figure out their next move after a big share price change. As a result, it makes sense to make a bet in the direction of the breakout from the channel.
Since this consolidation is coming after a prolonged uptrend, Wal-Mart looks likely to resume upside once this rectangle has run its course. Momentum backs that up -- 14-day RSI has been in an uptrend since November, and it looks like it’s just starting to bounce off of its trend line. Since momentum is a leading indicator of price, that’s a good sign.
I’d recommend keeping a close eye on $79 in May.
Everyone’s favorite social network, Facebook (FB), reported its first-quarter numbers yesterday, reporting mixed results as sales topped estimates while users stagnated. Even though shares are pointing higher early in this morning’s trading, this stock is showing some technical signs of a top in the longer-term.
Facebook has been forming a head and shoulders top, a 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 $25 for FB. A drop below that $25 level would be a major sell signal for the stock.
Even though the head and shoulders is a well known pattern (maybe too well known), it’s worth heeding. 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 a very close eye on FB in May.
It's not surprising that we’re seeing the exact same price action in Zynga (ZNGA) right now. The online social game maker ebbs and flows with Facebook, where most its games are played. In a sense, ZNGA is just high-beta Facebook: a more volatile way to bet on the social networking giant. And like FB, Zynga looks “toppy” right now.
Zynga is forming a head and shoulders top with a neckline at $3. A breakdown through that price signals that it’s time to sell before buyers completely evaporate. You see, with any technical pattern, it’s critical to think in terms of buyers and sellers, not shapes. After all, rectangles, 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 that it’s tradable. Instead, that all comes down to the supply and demand caused by those buyers and sellers.
The neckline at $3 is a place where a glut of buyers has been willing to step in and put a floor in the stock up until now. A breakdown 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 have room to drop.
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