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BALTIMORE (Stockpickr) -- Perspective matters a lot in the markets. The 1.05% drop in the markets yesterday feels like a real gut punch for equity investors, for instance, but it wasn’t long ago that a 1% red day was a pretty typical down move. This week, it feels like an indictment on the market, but 15 months ago, it was just noise.
Make no mistake -- the weak hands are getting tested in April after new all-time highs in the S&P 500 sent investors questioning whether it still makes sense to own stocks. There’s a big shift taking place right now among investors -- it’s a question of what’s scarier: seeing stocks drop from here, or missing out on a rally that most retail (and institutional) investors haven’t fully participated in.
So while investors should certainly be thinking about the potential of a correction, things still look very bullish indeed from both a technical and fundamental standpoint. We’re still in a stock-picker’s market by and large, and that means that there are still important setups coming together in some of the most heavily traded names on Wall Street. Today, we’ll take a technical look atfive of them.
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 the charts of five high-volume stocks to trade for gains.
We’ll start with the most volatile name on our list this week, Netflix (NFLX). The video service has been all over the place in the last year, but more recently things have been more one-sided: Since the calendar flipped over to 2013, this stock has seen its shares rally by 83%. Now, with shares consolidating sideways, there’s a tradable setup in this stock.
That’s because Netflix is consolidating in a pattern called a rectangle. The pattern is formed by horizontal resistance above shares at $200 and horizontal support below shares at $160. That’s a very wide range, but that is endemic to volatile stocks like NFLX. Think of it this way: As long as NFLX stays within that $40 range, its price action is meaningless. Instead, traders should be watching for a breakout outside of the channel. When the breakout happens, expect Netflix to continue moving in the direction of the breakout.
That makes NFLX especially important to watch on the downside. Shares gapped up hard early in 2013 following strong earnings numbers, and a move below $160 makes this stock likely to re-fill the gap. On the other hand, investors looking for a buying opportunity should wait for a move through $200. Yes, that means ceding points by sitting on the sidelines, but that opportunity cost is repaid in the form of a higher-probability trade setup.
We’re seeing the exact same setup in shares of Neustar (NSR) right now. NSR is forming a rectangle with resistance at $47 and support down below at $43. Just like with Netflix, the trading signal comes when shares of NSR move outside of their trading range. Then it makes sense to make a bet in the direction of the move.
Shares of NSR have been in an uptrend since back in November, and consolidations aren’t uncommon after a large move higher. They give investors a chance to catch their breath after significant price action. That means that we could see the uptrend resume in NSR.
With any technical pattern, it’s critical to think in terms of buyers and sellers -- not shapes. After all, triangles, 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 why it’s tradable. Instead, that all comes down to the supply and demand caused by those buyers and sellers.
The horizontal resistance level at $47 is a place where a glut of sellers has been willing to step in and put a ceiling in the stock. A breakout means that increasingly eager buyers have absorbed all of the excess supply for shares sitting at that level -- and without that barrier in place, shares have room to rally to the upside (the opposite is true on a drop through $43).
That’s why a move through $47 is a buy signal.
You don’t have to be an expert technical analyst to see what’s going on in shares of Pfizer (PFE) -- shares of the pharmaceutical giant have been rallying higher in an uptrending channel.
That price channel gives traders a high-probability range for Pfizer’s price action to stay within. When you’re looking to buy a stock within a trend channel, buying after a bounce off of support 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). With Pfizer coming off of a bounce from March, now’s a lower-risk time to be a buyer.
Momentum, measured by PFE’s 14-day RSI line, has been adding some bullish confirmation to this setup for the past few months -- RSI has remained in an uptrend through all of Pfizer’s corrections this year, and that uptrend is remaining intact now. Since momentum is a leading indicator of price, that’s a very good sign for bulls.
Things aren’t looking so bullish right now for shares of JPMorgan Chase (JPM). While this giant bank had been in an attractive uptrend of its own for the better part of the last six months, shares broke down back in mid-March, falling into a downtrend. For all of the same reasons that the uptrend in Pfizer is bullish, the new downtrend in JPM is a key red flag.
Shares of JPM are now testing support at $47, a price level that’s been a pocket of demand for the last quarter. A break of that $47 level is enough of a confirmation to justify selling -- or shorting -- JPM.
Analog Devices (ADI), the final stock on our list, is another ostensibly bearish setup to keep an eye on right now. Shares of the semiconductor industry stalwart have been rallying (alongside most equities) for the better part of the last six months, but like JPM, it’s starting to show some signs of weakness right now.
In ADI’s case, the pattern to watch is a triple top, a price setup that’s formed by three swing highs that hit their heads on the same price level. The sell signal comes when shares move through the “breakdown level” that connects the bottom of the pattern. With ADI moving through that level in yesterday’s downside session, today’s price action in ADI is going to be critical to watch. If shares confirm the breakdown, traders should consider that a sell signal.
For both JPM and ADI, the bearish signals setting up right now aren’t necessarily signs the floor is getting ready to fall out – Mr. Market is still in the middle of a primary uptrend -- but for more-nimble traders who want to profit from short-term action, there’s a trade to be made here.
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.