Must-See Charts: How to Trade 5 Big Stocks for Big Gains
BALTIMORE (Stockpickr) -- 2015's sideways churn in stocks looks like it's continuing in March. So far this week, the big S&P 500 index has dipped by 0.28%, bringing the big index's year-to-date performance to all of 1.99%.
The good news is that we're not all that far off from where the big index started the year in 2014 -- and we still closed the books in December with double-digit gains for the S&P. But looking at the stock indices does obscure what really happened on an individual basis last year. There's no question that it was a stock picker's market.
And that's certainly the case this year; despite the flat start for the S&P, there's been no shortage of big stocks making equally big moves. To take advantage of that activity in the individual names, we're taking a technical look at five must-see charts.
First, a little on the technical toolbox we're using here. 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 big stocks to trade this week.
Regeneron Pharmaceuticals
Up first is $42 billion drug maker Regeneron Pharmaceuticals (REGN) - Get Report. Regeneron has had a solid run over the course of the last year, climbing more than 25% since last March. But don't worry if you've missed the move. REGN looks ready to kick off a second leg higher. Here's how to trade it:
REGN is currently forming a textbook ascending triangle pattern. The ascending triangle is a trading setup that's formed by horizontal resistance above shares (up at $430 in this case), and uptrending support to the downside. Basically, as Regeneron bounces in between those two technically important price levels, it's been getting squeezed closer to a breakout above that $430 price ceiling. When that happens, we've got our buy signal.
Relative strength is the side indicator to watch in shares of REGN right now. Our relative strength line has been un an uptrend of its own going back to last summer, an indication that REGN isn't just moving up, it's also outperforming the broad market in good times and bad ones. As long as that uptrend in relative strength remains intact, REGN should keep outperforming the rest of the market.
Stryker
We're seeing the exact same price setup in shares of Stryker (SYK) - Get Report, a $35 billion medical device maker. Just like REGN, Stryker is currently forming an ascending triangle setup after rallying double-digits over the course of the last year. The breakout level to watch in SYK is $96.
Why all of that significance at that $96 level? It all comes down to buyers and sellers. Price patterns, like this ascending triangle in SYK, are a good quick way to identify what's going on in the price action, but they're not the actual reason a stock is tradable. Instead, the "why" comes down to basic supply and demand for Stryker's stock.
The $96 resistance level is a price where there has been an excess of supply of shares; in other words, it's a spot where sellers have previously been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above $96 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
Don't be early on this trade. Shares of SYK are testing the bottom of their triangle this week.
Equity Residential
Stepping outside of the health care sector brings us to $28 billion REIT Equity Residential (EQR) - Get Report. At first glance, this housing landlord looks pretty similar to the price setups in Regeneron and Stryker, but there is one big difference: EQR's price action is being bounded by horizontal support and resistance lines. While that sideways churn may not seem tradable, it is.
The sideways price action in EQR is a "rectangle" pattern. It gets its name because the pattern basically "boxes in" shares between those support and resistance lines. For EQR, the levels to watch are resistance up at $80 and support just above $76. It pays to be reactionary with this price chart, after all, rectangles are "if/then patterns." Put a different way, if Equity Residential breaks out through resistance at $80, then traders have a buy signal. Otherwise, if the stock violates support at $76, then the high-probability trade is a sell.
Consolidation setups like this one are common after big moves, and since EQR's prior trend was up before shares started chugging sideways, a breakout above $80 is the likely outcome. Still, it's important to wait for the breakout to happen before you play this trade. Buyers and sellers haven't figured out who's in charge yet.
General Mills
Let's take a step back here. The good news is that you don't need to be an expert trader to figure out what's been going on in shares of General Mills (GIS) - Get Report lately. Instead, this price pattern is about as simple as they get -- and it's giving traders a low-risk buying opportunity in March.
General Mills has been bouncing its way higher in a textbook uptrending channel since last fall. The price channel in GIS is bounded by a pair of parallel trend lines that identify the high-probability range for shares to stay within. Put simply, every bounce off of trend line support has been an opportunity to buy, and shares are coming down to re-test support again this week. From here, it makes sense to buy the next bounce.
Waiting to buy 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 support gets violated, and 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 GIS can actually still catch a bid along that line before you put your money on shares.
Mondelez International
Last on the list is another mega-cap food stock, Mondelez International (MDLZ) - Get Report. This $60 billion Oreo and Triscuit maker has been rallying sharply since mid-October, but shares have lost some steam in recent months. That's actually not necessarily a bad thing now -- MDLZ is forming a classic "bottoming" setup that signals sellers are getting exhausted.
MDLZ is currently forming an inverse head and shoulders pattern. You can spot the inverse head and shoulders by looking for 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 breakout above the pattern’s “neckline” level at $37.50.
The bullish setup in Mondelez is getting confirmed by momentum right now. Our momentum gauge, 14-day RSI at the top of the chart, has been in a steady uptrend since the buying started back in October, even while MDLZ's price was making lower lows in the setup's head. That's a signal that buying pressure is still building in this stock.
When $37.50 gets taken out, expect shares to re-test prior highs just above $39.50.
-- Written by Jonas Elmerraji in Baltimore.
Author had no positions in stocks mentioned.