BALTIMORE (Stockpickr) -- It's time to get tactical. Whether you're a trader or a buy-and-hold investor, adding a tactical element to your portfolio can boost your gains and reduce risk -- especially now, with the broad market scraping up against new all-time highs for another week.
Trading tactically means loading up on high-probability setups for the current market conditions. Even though the big indices have mostly dragged sideways for the last month, there's no shortage of attractive trading setups in the individual names right now.
To get tactical, we're turning to the technical charts today for a closer look at high-probability trading setups in five large-cap stocks .
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.
Up first is big pharma firm Merck (MRK) - Get Report. Merck has been a strong performer so far in 2014 -- since the first session of January, this drugmaker is up more than 16% -- and it's also a name that's likely to hike its dividend payouts soon. But don't worry if you've missed the move in Merck year-to-date; shares look likely to kick off a second leg higher in August.
Merck is currently forming an ascending triangle pattern, a bullish price setup that's formed by horizontal resistance above shares (at $59 in this case) and uptrending support to the downside. Basically, as MRK's share price bounces in between those two technically important price levels, it's getting squeezed closer to a breakout above that $59 price ceiling. When that happens, we've got a buy signal in shares.
Relative strength adds some extra confidence to the MRK trade. Even while this pattern has been setting up, MRK's relative strength line has been moving in a shallow uptrend. Translation: This stock isn't just moving higher -- it's also outperforming the S&P 500 along the way.
As long as relative strength keeps making higher lows, this stock should keep beating the rest of the market.
We're seeing the exact same trading setup right now in shares of department store retailer Macy's (M) - Get Report. For Macy's, the breakout level to watch is $60. If shares can catch a bid above that level, then M becomes buyable.
Why all of that significance at that $60 level? It all comes down to buyers and sellers. Price patterns 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 Macy's stock.
The $60 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 $60 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. When it happens, it makes sense to keep a protective stop below Macy's nearest swing low at $56.50.
For more on retail stocks, check out "5 Retailers Fighting Back Against Amazon for Back-to-School Sales."
India's second-largest bank has been in rally mode all year long, climbing more than 36% since the calendar flipped to January. And while shares of Icici Bank (IBN) - Get Report have slowed their price action down since the start of June, it's very close to flashing a high-probability buy signal again in August. Here's how to trade it.
IBN is currently forming a "rounding bottom" pattern, a price setup that indicates a gradual transition in control from sellers to buyers. The pattern's name is a pretty good description of how it looks on a chart. Even though IBN's rounding bottom formed at the top of its recent price range (not the bottom), the trading implications are just the same: The buy signal triggered on a move through resistance at $52.
The 50-day moving average has been a pretty good proxy for support going back to March, a fact that makes it a logical place for a protective stop. If IBN can push through that $52 resistance level this coming week, it's a high-probability buy.
Tech titan Apple (AAPL) - Get Report is looking bullish right now -- and you don't need to be an expert technical trader to see why. Apple has been bouncing its way higher in a textbook uptrending channel going back to the beginning of May. That makes Apple a classic "buy-the-dips stock."
The uptrending channel in AAPL is formed by a pair of parallel trend lines that have provided traders with a high probability range for shares to trade within. Put simply, every successive test of trend line support in AAPL since May has been a low-risk entry opportunity to get in on Apple's uptrend. For that reason, it makes sense to buy the next bounce in this technology giant.
Waiting for a bounce off of trend line support is a key risk management strategy for AAPL buyers for two big reasons: It's the spot where shares have the furthest to move up before they hit resistance, and it's also 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 Apple can actually still catch a bid along that line before you put your money on shares.
We're seeing the exact same price setup in oil and gas supermajor Chevron (CVX) - Get Report. Like Apple, Chevron has spent the last few months bouncing its way higher in a textbook uptrending channel. Unlike Apple, Chevron's setup has been longer-term (it started at the beginning of February), and shares are testing trend line support for the sixth time this week.
The signal to jump into a CVX position comes on this stock's next white bar day. Remember, it's critical to wait for shares to actually stage that bounce off of trend line support before buying the dip in Chevron.
Momentum, measured by 14-day RSI, is the indicator that adds confidence to a bounce in Chevron. Our momentum gauge has been making higher lows over the course of the pattern. Since momentum is a leading indicator of price, it bodes well for this uptrend's staying power. After the bounce, the 50-day moving average is a good place to keep a protective stop.
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.
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At the time of publication, author was long AAPL. 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