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5 Trading Setups With Upside This Week - views
BALTIMORE (Stockpickr) -- The bull market rampage keeps on keeping on in May, after a correction last week gave way to another round of buying on Monday. All told, it's been more than 100 days since the last three-day losing streak in the Dow, an all-time record that the blue-chip index managed to pull off (albeit just barely) after clawing its way higher before last Friday's close.
If you think that the lack of losing days in stocks is a reason to be a seller, think again. This is one of the most hated market rallies in history, and stocks are climbing in spite of a lack of active buyers -- not because of exuberant stock bulls.
Instead, this rally looks structural right now. It's being fueled by a combination of the Fed's battle with deflation and a selling population that's already given up the ghost. That's why, as buying opportunities pop up in names right now, it makes sense to keep buying.
Today we'll take a technical look at five stock trades that look attractive.
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 CVS Caremark (CVS), the retail pharmacy and benefits manager combo that's been on fire this year. Year-to-date, CVS has rallied approximately 25%, besting the broad market's impressive climb by more than 8%. Now, as CVS bounces off of support, this stock is throwing off another buy signal.
You don't have to be an expert technical analyst to figure out what's going on in CVS; the stock has been trading in an uptrending channel for the last half-year. 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). That's exactly where CVS is right now.
Trendline support has been a place where CVS has been able to catch a bid on its last six attempts -- and there's still a lot of upside potential left in this name as it trades up the channel. If you jump in here, I'd recommend keeping a protective stop at the 50-day moving average.
Oaktree Capital Group
The exact same price pattern is in play in shares of Oaktree Capital Group (OAK), an alternative-focused investment management firm. Like CVS, OAK is bouncing higher in an uptrending channel -- and shares are testing trendline support recently.
If OAK can show that it's able to catch a bid a support, then it makes sense to jump in. We'll get the go-ahead signal if OAK stages a bounce from here. While Oaktree found some semblance of support at a higher level midway through its rally, the trendline support level started back in early December is still the level that's held the most importance for this stock.
The 50-day moving average has acted as a pretty good proxy for support for most of this setup. I'd recommend keeping a stop just below that level when shares shove off their trendline.
A channel of a different sort is creating a tradable setup in shares of mid-cap chemical stock Valhi (VHI). While shares of VHI are up more than 27% since the start of January, most of this year's upside came from the first two weeks of 2013. Since then, shares have been trading sideways in a sideways channel called a rectangle.
Here's how to trade it.
A rectangle is a technical price pattern that basically boxes-in shares with a horizontal resistance and support level. In Valhi's case, resistance is at $17, and support is down at $15.50. A move through either of those lines is a signal to trade in the direction of the breakout, but this pattern is showing some bias to the upside right now. That makes a move through $17 the buy signal to watch for.
Momentum, measured by 14-day RSI, spent the first few months of the year in a downtrend, a bearish divergence that tipped off the end to VHI's uptrend in late January. But the downtrend broke in the middle-of April, and it's been trending higher (however shallowly) ever since. Because momentum is a leading indicator of price, that momentum turnaround is a good sign, but it's still crucial to wait for the move through $17 before putting money on this trade.
CBRE Group (CBG) is showing us the exact same rectangle setup right now. In CBG's case, resistance comes in at $25.50 and support is down at $23.50. That relatively tighter range means that CBRE Group has less room to move before we get a breakout signal. Just like with Valhi, you want to buy the breakout above resistance at $25.50.
Whenever you're looking at any technical price pattern, it's critical to think in terms of buyers and sellers. Rectangles, channels 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 $25.50, 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. Don't be early on this trade.
Last up is publishing firm Gannett (GCI), a stock that's been enjoying some compelling relative strength in 2013. Gannett is currently forming a rounding bottom pattern, a price setup that indicates a gradual shift in control from sellers to buyers. As the name implies, rounding bottoms are reversal patterns that typically take place at the bottom of a stock's recent price range. But Even though Gannett's rounding bottom isn't exactly textbook, the trading implications are just as potent.
Remember, supply and demand has a lot more to do with a stock's trading potential than shapes on a chart do. In GCI, resistance at $22 is a level where there's been excess supply of shares since back in the beginning of March. More recently, though, the higher lows in Gannett's price indicate that buyers have control below that $22 breakout level. If buyers can absorb all of that excess supply and push prices above $22, then we've got a buy signal for this stock.
If you decide to buy that move, keep a protective stop at the 50-day moving average; it's been a pretty good proxy for support in this chart too.
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