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BALTIMORE (Stockpickr) -- You know it's been a crazy month for stocks when yesterday's 0.07% decline in the S&P 500 was one of the four biggest down days in May.
I, for one, don't necessarily think that's a bad thing. As breakneck as the market's pace has been this month, this rally has been nothing if not orderly -- I've been saying that since the S&P's uptrend started back in November. This week, as the broad market peeks up into overbought territory for the second time in this rally window, I think we're due for a correction. Just not necessarily a downward one.
After all, the last time the S&P hit "overbought" on is momentum gauge, the big index managed to keep its grasp on the top of its price channel for the next few weeks.
We're not exactly in uncharted territory here -- so why should this time be any different?
That's why, today, we'll take a technical look at five stock trades that look attractive right now.
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.
So, without further ado, let's take a look at five technical setups worth trading now.
First up is ConAgra Foods (CAG), the food company behind many of the popular brands on your grocer's shelves. But it's not the food that's making ConAgra a tradable name this week -- it's the chart.
Right now, ConAgra is forming an ascending triangle pattern, a setup that's formed by a horizontal resistance level above shares and an uptrending support level to the downside. As CAG bounces in between those two technically important price levels, it's getting squeezed closer and closer to a breakout above resistance at $36. When that happens, we've got a buy signal in this $15 billion food company.
Momentum, measured by 14-day RSI, has been bleeding off for the last two months. While that's not a positive sign for the pattern, the fact that RSI has been hugging its own trend line resistance level has some good implications. Since momentum is a leading indicator of price, we'll likely see a breakout in RSI before CAG's price breaks out. Treat it like an early-warning signal for this trade.
We're seeing the exact same setup forming in UK-based data company Reed Elsevier (RUK). For RUK, the breakout level to watch is $47, which is the resistance level that's been acting like a price ceiling for shares since the end of March. A breakout above $47 means that it's time to start buying.
Whenever you're looking at any technical price pattern, it's critical to think in terms of buyers and sellers. Triangles, rectangles and other 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 resistance line at $47, for example, is a price where there's an excess of supply of shares; in other words, it's a place where sellers have been more eager to take recent gains and sell their shares than buyers have been to buy. That's what makes the breakout above it so significant; a breakout indicates that buyers are finally strong enough to absorb all of the excess supply above that price level.
At first glance, one thing that's obvious in RUK's chart is the abundance of gaps. Those gaps may make the chart look somewhat less well defined than that of CAG, but they can be ignored for all intents and purposes. Those gaps, called suspension gaps, occur because Reed Elsevier's shares trade off U.S. hours on the London and Euronext stock exchanges. From a technical standpoint, they're not significant.
Mizuho Financial Group
It's been a good year for large-cap Japanese bank Mizuho Financial Group (MFG). Shares of the bank have rallied more than 18% year-to-date and more than 36% in the last six months. Now the pattern that's been forming in shares for most of 2013 points to even more upside for shareholders of MFG.
That's because Mizuho is currently forming an inverse head and shoulders pattern. The setup, which indicates exhaustion among sellers, is formed by two swing lows that bottom out around the same level (the shoulders), separated by a bigger trough called the head; the buy signal comes on the breakdown above the pattern's "neckline" level, currently right at $4.50.
Even though the setup in MFG isn't exactly textbook -- inverse head and shoulders patterns typically occur at the bottom of a downtrend, not the top of an uptrend -- the trading implications are exactly the same. When the sellers sitting atop $4.50 get taken out, it makes sense to be a buyer. Keep a protective stop just below the right shoulder at $4.20.
One stock that's showing traders a more conventional bottoming pattern is VMWare (VMW). Shares of the IT virtualization firm have gotten absolutely shellacked in 2013, tumbling more than 18% during a time when the broad market has been rallying extremely hard. But shareholders could be in for a reprieve if the double-bottom in VMW triggers.
A double bottom is just what it sounds like -- it's formed by two swing lows that bottom out at approximately the same level. The buy signal comes when shares are able to break out above the peak that separates the two bottoms. For VMW, that peak is a bit higher than standard at $85, but it's a price that's at least within grabbing distance right now. I'd recommend picking up shares if they can print above that level.
One big component of VMW's decline in 2013 was a major gap down after a poor outlook from management at the end of January. With that gap still left unfilled, VMW could move quickly once $85 gets taken out. While that level is still a good bit away, it's worth keeping a close eye on this stock.
You don't have to be an expert technical analyst to figure out what's going on in shares of Luxottica Group (LUX). This $25 billion eyewear company has been moving higher in an uptrending channel since all the way back to last summer. With trend line support holding a floor in place for shares of LUX, it still makes sense to be a buyer on the way up.
When you're looking to buy a stock within a trend channel, buying after a bounce off of support is good strategy 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). LUX is testing its trend line today, so wait for an indication that shares can still catch a bid at support before jumping in.
The 50-day moving average has been a pretty good proxy for support over the course of this uptrend; that's where I'd recommend keeping a stop.
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
Follow Jonas on Twitter @JonasElmerraji