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Stocks Are in Make-or-Break Mode: 5 Must-See Charts - views
BALTIMORE (Stockpickr) -- Stocks are in make-or-break mode this morning, after a 1.38% decline in the S&P 500 shoved the index down to a key technical level. Now the question is whether Mr. Market will continue dropping from here -- or whether he'll quickly reverse course. I'll try to answer that question today.
It's an understatement to say that this rally has been orderly. Since the calendar flipped over to 2013, the S&P has only had nine two-day down "streaks" -- and it's only posted two stretches in 2013 of three straight negative days in the big index. That makes today's price action pretty significant; it would mark the third time this year that the S&P has moved lower for three straight days.
You know things are going well for investors when three down days is an event.
More important is where the S&P 500 index is right now. With yesterday's close at 1,608.90, the S&P is just a few points above a key support level that's been in place for months -- more on that in a minute. The critical nature of today's price action is creating a big opportunity in individual stocks as well. That's why we're taking a technical look at five big tradable names right now.
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.
SPDR S&P 500 ETF
The most important technical story right now is the one that's going on in the broad market. We'll use the SPDR S&P 500 ETF (SPY) as our more investible proxy for the big index. A quick glance at SPY's chart does a good job of explaining what's going on in stocks right now; you don't have to be an expert technical analyst to figure out that this market is in an uptrend.
In the last week and change, bears have been blowing their victory horn, excited about the 3.6% drop from the high water mark the market put in on May 22. But it's clearly too early to draw a conclusion about this market's ability to catch a bid from here -- nothing is broken yet. The trendline that's connected SPY's swing lows remains intact at this point, and until that changes, we remain in an uptrend. This ETF has managed to catch a bid at trendline support the previous four times the line has been tested.
Now the question is whether investors have reason to believe that it'll be different this time. My guess is no.
Momentum, measured by 14-day RSI, has a support level at its own just below 50 -- a level that's getting tested today as well. In short, we're oversold for the S&P's rally range right now, a fact that should ramp up the potential for a reversal. And judging by previous bounces off of support, it could be a big one.
I'd recommend treating a higher close today as a buy signal for stocks. On the other hand, if we start the weekend anywhere below the 50-day moving average, this uptrend is over.
Whirlpool (WHR) is showing traders the exact same setup as the broad market right now. Just like the S&P, Whirlpool is locked in a textbook uptrend right now, and just like the big index, WHR is coming down to test trendline support this week. That shouldn't come as a huge surprise -- correlations between the S&P and its constituent stocks remain very high. That means that a considerable number of names are more or less mirroring the S&P's price action right now.
In Whirlpool's case, there are a few notable differences. For starters, WHR has already violated its 50-day moving average, but a quick glance at the chart shows that Whirlpool's average hasn't acted like nearly as useful a proxy for support as in SPY. Despite that, the stock's trendline has been arguably stronger than the broad market's, shoving WHR higher on the last eight tests of the price level.
WHR's ability to catch a bid along that trendline is impressive -- and it indicates that we're approaching another buying opportunity. Like with SPY, I'd recommend actually waiting for a bounce off of support before jumping into a position in WHR. Trendlines do eventually fail, but determining that there's still demand underlying support means that WHR is less likely to do so while you're holding the bag.
In keeping with our theme, the next stock we're honing in on is News Corp. (NWSA). Like SPY and WHR, News Corp's stock chart is showing traders an uptrending channel.
The big difference is that NWSA's channel had a tighter support level that already got taken out. While the violation below S1 signaled a drop to the blue line, it likely already shook out a lot of weak hands in this stock.
Today, like the other channel trades we're watching, shares of NWSA are testing trendline support. The buy signal comes on the bounce off of that blue line. Trend channels are mean reversion trades; that means that they don't require any kind of watershed moment in a stock's price action to work out.
Instead, NWSA just requires the lack of a major supply imbalance for shares to hold support. That looks like the likeliest outcome from here.
More specifically, AIG is currently forming a rectangle, a price pattern that's formed by a horizontal resistance level above shares at $46 and a horizontal support level below shares at $43. The "boxing in" of AIG's price action gives the rectangle its name. Rectangles are consolidation patterns -- they give market participants a chance to cool off and figure out their next step after a major price move. AIG's parabolic price action in late April was that move.
Whenever you're looking at any technical price pattern, it's critical to think in terms of buyers and sellers. After all, 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.
AIG's resistance level at $46, for instance, is a place where sellers have previously been more eager to sell and take gains than new buyers have been to keep bidding on shares. A move through that $46 level indicates that buyers have gained enough steam to absorb all of the excess selling pressure at that price. That shift is what makes it a buy signal.
Merck's (MRK) chart right now is the poster child for not judging a technical price pattern by its name. It'd be easy to ignore the cup and handle pattern that's been forming in MRK's chart, but you'd be leaving money on the table. In reality, MRK's cup and handle pattern works for the exact same reasons that the rectangle in AIG does: It indicates the supply and demand tradeoff in shares of this pharma giant.
More specifically, the pattern indicates a gradual shift in control of Merck from sellers to buyers. Resistance at $48.75 is a price that's been a rife with selling pressure for shares since mid-April -- and shares are testing a breakout in today's session. I'd recommend being a buyer if shares can hold above that breakout line for an entire session. Just keep a tight protective stop.
Merck's RSI line has been in an uptrend since the start of May. Since RSI is a leading indicator of price, that uptrend adds some extra confidence to this stock's breakout potential in June. Just watch that $48.75 level for the actual trade.
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
Follow Jonas on Twitter @JonasElmerraji