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Must-See Charts: Trades to Take Before the Ball Drops - views
BALTIMORE (Stockpickr) -- This is it. When the closing bell rings this afternoon, the books are closed for 2013. And what a year it's been.
In the last 12 months, the S&P 500 index has made its way 29.09% higher as of this morning's open, pushing up to new highs in the process. Indeed, investors will have something to celebrate when they pop the champagne at midnight tonight. But some magical switch isn't getting flipped just because the calendar is turning a page on Wednesday. So while most folks have already cut out early to ring in the new year, they're leaving money on the table.
That's why we're taking a closer look at five technical trades to take before the end of the year.
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 this week.
SPDR S&P 500 ETF (SPY)
All of the attention on the S&P this year warrants a closer look at the big index to start things off. Or rather, a closer look at its most tradable proxy, the SPDR S&P 500 ETF. It doesn't take a rocket scientist to see what's been going on in SPY in the last year; that chart is up and to the right.
But what's most significant about the S&P's price chart right now is the fact that the price action in the big index still looks healthy. SPY has been bouncing higher in a well-defined uptrending channel since November 2012, and all the way up it's been able to catch a bid on a consistent trendline support level. Despite the "Santa Claus Rally" that's propelled shares for the last week and change, things still don't look overbought. While SPY looks due for a minor correction, prices still haven't hit their head on resistance.
That's a very good sign as we head into 2014.
Another good sign comes from relative
strength. Since SPY is designed to track the S&P, an uptrend in relative strength indicates that investors are piling into the ETF more aggressively as a way to gain exposure to stocks.
Considering the fact that this rally has largely lacked participation from retail investors, that's a pretty auspicious indicator. This is still very much a "buy the dips market" -- when the next dip comes, buy it.
CBS Corporation (CBS)
We're seeing the exact same setup in shares of $38 billion media company CBS Corporation. Like SPY, CBS has been bouncing higher in a predictable uptrend for the better part of the last year. And like the big index, the best time to buy comes on a bounce off of trendline support.
Buying off a support bounce 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). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring CBS can actually still catch a bid along that line.
This stock has actually had more successful tests of support in 2013 than SPY did -- that's a positive sign. The 50-day moving average has acted as a solid proxy for support all the way up, so it's a logical place for a protective stop.
Medidata Solutions (MDSO)
Mid-cap medical software stock Medidata Solutions (MDSO) is the smallest name on today's list by far, but it's hard to ignore the technical trade that's been setting up in shares. Even though MDSO has already rallied more than 52% since the start of 2013, this name looks well positioned for some serious continuation in the New Year.
That's because Medidata is currently forming an ascending triangle pattern, a bullish price setup that's formed by overhead resistance at $62.50 and uptrending support to the downside. Basically, as shares bounce in between those two technical price levels, they're getting squeezed closer and closer to a breakout above resistance. When that move through $62.50 happens, we've got our buy signal.
MDSO is another name that's been showing off outsized relative strength lately. Considering the fact that the S&P look likely to show us a healthy correction sooner rather than later, positive relative strength trends are the single most important technical indicator traders can ask for right now. When the buy signal comes, I'd recommend putting a stop on the other side of the 50-day moving average.
Berkshire Hathaway (BRK.A)
Berkshire Hathaway, on the other hand, hasn't been seeing much in the way of relative strength in the last few months. Since the start of July, Berkshire's shares have only managed to gain a third of what the broad market has returned. But a breakout in shares of Warren Buffett's favorite stock means that fortunes are likely about to turn for shareholders.
Berkshire had been forming symmetrical triangle, a pattern that's formed by converging trendlines squeezing in on the stock's price at a nearly even rate. The symmetrical triangle has less upside bias than the ascending triangle we just looked at, but the trading trigger is essentially the same -- a breakout outside of the pattern is the signal to make a move. So, shares of Berkshire are flashing "buy" now.
With the breakout confirmed this week, resistance at $119 is the next major hurdle for Berkshire to overcome. If buyers can continue step in at new highs, Berkshire should have little trouble making up for the ground it lost in the last few months. If you decide to jump in here, just keep a
tight stop in place.
Last up is IBM, a tech behemoth that's been getting hit hard over the last year. IBM is the sole Dow Jones Industrial Average component that's actually down year-to-date. But it looks like investors could be in for a reprieve thanks to a bottoming pattern that's been taking place in shares.
IBM is currently forming a double bottom pattern, a bullish reversal setup that's formed by two lows that bottom out around the same price level. The two bottoms are separated by a breakout level to the upside at around $185 -- a move through that price is our buy signal on this stock.
IBM is testing a breakout through that $185 price level this week. If shares can hold the bid there in today's session, it makes sense to bet on a rebound in IBM.
Whenever you're looking at any technical price pattern, it's critical to think in terms of those buyers and sellers. Triangles, double bottoms, and other pattern names are a good quick way to explain what's going on in a stock, but they're not the reason it's tradable -- instead, it all comes down to supply and demand for shares.
That $185 resistance level is a price where there has been an excess of supply of shares; in other words, it's a place where sellers have been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above it so significant - the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
Momentum has been posting some higher lows in IBM since September -- now it looks like price is about to follow suit.
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.