Don't let yesterday's relatively small move in the S&P 500 fool you - the Santa Claus rally is actually off to a very strong start.
That's because, despite the relatively quiet trading session for the big market averages, the best segment of the individual stocks came back from the Christmas break in rally-mode.
More than four-dozen S&P components managed to climb 1% higher or more during Tuesday's otherwise flat trading session. That's an important message for investors right now: stock picking still matters in the final stretch of 2016. The performance gap between the best performers in the S&P and the worst ones remains wide and deep.
To figure out the stocks that look predisposed to outperform in the week ahead, we're turning to the charts for a technical look at five breakout buy signals.
In case you're unfamiliar with technical analysis, here's the executive summary: technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
Without further ado, here's a rundown of five technical setups that are showing solid upside potential right now.
Up first is aluminum giant Alcoa (AA) - Get Report. Just two months after splitting itself into two separate publicly-traded companies, Alcoa is looking ready to see a stock surge. Since the second half of November, this mid-cap commodity business has been looking bullish, forming a textbook ascending triangle pattern that's teetering on the edge of breakout territory.
Alcoa's ascending triangle setup is formed by horizontal resistance up above shares at $32, with uptrending support to the downside of the pattern. Basically, as this stock bounces in between those two technically significant price levels, it's been getting squeezed closer and closer to a breakout through its $32 price ceiling. When that happens, we've got a buy signal.
Since the ascending triangle is a continuation pattern, we're likely to see AA's price chart repeat its November rally once shares are able to top $32. That puts a possible $43 price target on Alcoa in early 2017. Remember, that higher price tag doesn't become a high-probability trade until AA can hold up above $32 first.
We're seeing the exact same price setup in shares of mid-cap Latin American airline stock Copa Holdings (CPA) - Get Report. Like Alcoa, Copa has been forming a textbook example of an ascending triangle setup for the last couple of months. For Copa, the breakout level to watch is resistance up at $95.
What makes that $95 level so important for this stock? It all boils down to buyers and sellers. Price patterns, like this ascending triangle setup, are a good quick way to identify what's going on in the price action, but they're not the ultimate reason shares look attractive here. Instead, the "why" comes down to basic supply and demand for Copa's shares themselves.
The $95 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 $95 so significant - the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Once that $95 breakout happens, it makes sense to park a protective stop on the other side of the 50-day moving average.
Off-price retailer Ross Stores (ROST) - Get Report is having a stellar year in 2016 - in the last 12 months, this retail stock has rallied 25%, leaving the rest of the stock market in its dust. And while it may not seem like Ross has made much progress in the last month, the sideways churn we've seen in shares more recently is actually setting this stock up for a bigger move in January.
The sideways price action in Ross is a "rectangle" pattern. It gets its name because the pattern basically "boxes in" shares between a pair of horizontal resistance and support lines. For Ross, the levels to watch are resistance up at $70 and support at $67. That setup makes Ross Stores an "if/then trade" right now. Put a different way, if Ross breaks out through resistance at $70, then traders have a buy signal. Otherwise, if the stock violates support at $67, then the high-probability trade is a sell.
Consolidation setups like this one are common after big moves, and since Ross' prior trend was up before shares started chugging sideways, a breakout above $70 is the likely outcome. The pattern we're seeing in ROST now looks a lot like the one that showed up in shares this fall - if history rhymes here, it should spell gains for investors who own this stock.
You don't need to be an expert trader to figure out what's happening in shares of mid-cap tech stock GoDaddy (GDDY) - Get Report. Instead, the price action in this internet services stock is about as straightforward as it gets. GoDaddy has been bouncing its way higher in an uptrend since February, and it's still a "buy the dips stock" this winter...
GoDaddy is currently forming an uptrending channel, the simplest of the technical price patterns. GoDaddy's setup is formed by a pair of parallel trendlines that have identified the high-probability range for this stock to remain stuck within all year long. In a nutshell, every test of trendline support so far has provided buyers with a low-risk, high-reward opportunity to build a position. Now, as GoDaddy moves back towards trendline support for the sixth time, it makes sense to buy the next bounce off of the bottom of the channel.
Actually waiting for that bounce is important for two key reasons: it's the spot where shares have the most room 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 the channel breaks, invalidating the upside trade). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring GoDaddy can actually still catch a bid along that line before you put your money on shares.
Mohawk Industries Inc.
Last on our list of year-end breakouts is large-cap flooring manufacturer Mohawk Industries (MHK) - Get Report. After breaking out last week, Mohawk is in breakout-mode - and it's not too late to take advantage of the upside in shares. Here's how to trade it...
Mohawk spent the last two months forming an inverse head and shoulders pattern, a classic bullish price setup that signals exhaustion among sellers. The inverse head and shoulders pattern is formed by two swing lows that bottom out at approximately the same level (the shoulders), separated by a lower low (the head). The buy signal came on a move through Mohawk's neckline at the $202.50 level. Even though Mohawk's price setup isn't completely textbook, it's tradable now that $202.50 has been taken out.
Price momentum, measured by 14-day RSI, is the side-indicator to look at in Mohawk Industries. Our momentum gauge has made a series of higher lows during this stock's inverse head and shoulders setup, a bullish divergence that indicates buyers are stepping in behind the scenes. If you decide to pull the trigger on Mohawk here, the 50-day moving average makes a logical place to park a protective stop.
At the time of publication, author had no positions in the stocks mentioned.