BALTIMORE (Stockpickr) -- When it comes to investing, a rising tide lifts all boats -- and the tide is finally rising at the end of May.
After spending close to three months churning sideways, the S&P 500 index finally broke out above the top of its range in yesterday's session, clearing the way for materially higher stock prices this summer. Even though most of the attention has been on the S&P's move above 1,900 earlier this week, yesterday's breakout in the big index is the real factor in higher share prices early in this morning's session.
And with that, we're seeing similar bullish price action in the big individual names this week. That's why we're taking a technical look at trading setups in five of Wall Street's biggest stocks today.
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.
First up is big bank Wells Fargo (WFC) - Get Report, a name that I'm already a fan of this week thanks to its Rocket Stock status. But the technical picture in Wells looks equally compelling this week. And now we're getting a big buy signal for shares of this $266 billion banking stock.
Wells Fargo is currently forming an ascending triangle pattern, a bullish price setup that's formed by a horizontal resistance level above shares (in this case at $50), and uptrending support to the downside. Basically, as WFC bounces in between those two technically significant price levels, it's been getting squeezed closer and closer to a breakout above that $50 price ceiling. We got that buy signal confirmed in yesterday's session.
Relative strength adds some important backup for a buy signal in WFC. That performance indicator has been in an uptrend since last summer, a signal that this stock is continually outperforming the S&P in good times and in bad ones.
PPG Industries (PPG) - Get Report is another breakout trade to watch out for this week. Unlike the Wells Fargo trade, PPG hasn't actually broken out yet -- but it's encouragingly close at the start of the session today. Here's how to trade this $27 billion paint and coatings maker.
PPG is currently forming a "rounding bottom" pattern, a price setup that indicates a gradual transition in control from sellers to buyers. The patterns name is a pretty good description of how it looks on a chart. Even though PPG's rounding bottom came in at the top of its recent price range (not the bottom), the trading implications are just the same. The buy signal triggers on a move through our $200 price ceiling.
The side-indicator to look at in PPG is momentum, measured by 14-day RSI. Our momentum gauge has been making higher lows all the while this stock's share price has remained constrained below $200. That's a good indication that buyers are gaining steam behind the scenes.
Wait for $200 to get taken out before you jump in. Going long PPG doesn't become a high-probability trade until then.
While the big indices have struggled to climb higher in 2014, upside hasn't been as much of an issue in auto parts maker BorgWarner (BWA) - Get Report. Shares of the $15 billion auto supplier are up more than 11% since the calendar flipped to January. That means that BWA is beating the S&P by a factor of three right now. Never mind the fact that shares have remained mostly sideways since March; that consolidation is the exact thing that makes BWA tradable from here.
BorgWarner is forming a rectangle pattern, a price setup that's formed by a pair of horizontal resistance and support levels that basically "box in" shares between $64 and $59. Rectangles are "if/then patterns": If BWA breaks out through resistance at $64, then traders have a buy signal. Otherwise, if the stock violates support at $59, then the high-probability trade is a sell. Since BWA's price action leading up to the rectangle was an uptrend, it favors a move to the upside through $64.
Why all of that significance at $64? 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 BorgWarner's stock.
The $64 resistance level is a price where there has been an excess of supply of shares; in other words, it's a spot at which 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 $64 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
Wait for shares to catch a bid above resistance before you buy it.
You don't have to be an expert technical analyst to figure out what's going on in shares of industrial conglomerate United Technologies -- a quick glance at the chart will do. UTX is bouncing higher in a textbook uptrending channel, a setup that's about as simple as they get.
So what do you do from here? Buy the bounce.
When it comes to price channels, up is good and down is bad -- it's really just as simple as that. UTX's channel is bounded by resistance above shares and trend line support below them; those two parallel trend lines provide a high probability range for shares of this stock to trade between. So with shares of the firm moving down to test support for a fifth time since September, it makes sense to buy the next bounce off of trend line support.
If you decide to buy on the next leg up, I'd recommend keeping a protective stop right under UTX's previous swing low at $113. If shares were to break down below that price level, the uptrend is broken, and you automatically won't want to own this trade anymore.
American Electric Power Company
Last up is American Electric Power Company (AEP) - Get Report, a $26 billion utility holding stock that just happens to be showing us the exact same setup as the one in United Technologies right now. Like with UTX, it makes sense to buy AEP on a bounce off of trend line support. That makes shares look very buyable today.
Holding out for this week's big bounce off of support is crucial 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 AEP can actually still catch a bid along that line before you put your money on shares.
The 50-day moving average has been a stellar proxy for support going back to last fall. If you decide to be a buyer here, I'd recommend putting a protective stop below the 50-day.
To see this week's trades in action, check out the Must-See Charts portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
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Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to
. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in
Investor's Business Daily
. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation. Follow Jonas on Twitter @JonasElmerraji.