U.S. markets are continuing their climb this week. So far, the big S&P 500 index has charged 5.82% higher year-to-date. Just to put that in a little perspective, that would translate into a 45.6% total return for the full year if the S&P kept that pace up.
And the stats look even rosier when you zoom into the individual stocks. As I write, about 27% of the stocks in the S&P are up 10% or more since the calendar flipped to January. That's some pretty stellar outperformance in a very large segment of the market in 2017. In short, stock picking still matters a whole lot in this market—and one of the best tools to search out serial outperformers is a stock chart.
So, to find the big stocks that look ready to rally in the final stretch of February, we're turning to the charts for a technical look at five big breakout trades to buy—and when you should buy them.
First, a quick note on the technical toolbox we're using here: technical analysis is 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...
Up first on our list of Rocket Stocks is $44 billion railroad stock CSX Corp. (CSX) - Get CSX Corporation Report. So far, 2017 has been a banner year for CSX—shares are up more than 33% since January, outperforming the rest of the broad market by a huge margin. But don't worry if you've missed that upside move in CSX so far; the chart is pointing to a second leg higher in the next few sessions.
CSX is currently forming an ascending triangle pattern, a bullish continuation setup that's formed by horizontal resistance up above shares at $49, and uptrending support to the downside. Basically, as CSX pinballs in between those two technically significant price levels, shares have been getting squeezed closer and closer to a breakout through that $49 price ceiling. When that happens, we have a brand new buy signal in this stock.
Relative strength, the side-indicator down at the bottom of CSX's stock chart, adds some extra confidence after the $49 breakout happens in CSX. That's because our relative strength gauge has been making higher lows since the end of the summer, an indication that this stock is continuing to outperform the broad market despite the sideways price action in February. Stay tuned—shares are within grabbing distance of that $49 price ceiling today.
We're seeing the exact same price setup right now in shares of $40 billion cruise ship operator Carnival Corp. (CCL) - Get Carnival Corporation Report. Like CSX, Carnival is forming a textbook example of an ascending triangle pattern after a strong run over the course of the past few months. For Carnival, the breakout level to watch out for is resistance up at $57.
What makes that $57 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" is driven by basic supply and demand for Carnival's shares themselves.
The $57 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 $57 so significant—the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Once the push above $57 happens, consider placing a stop on the other side of the 50-day moving average. If the 50-day gets violated, then the breakout is invalidated and you don't want to own CCL anymore.
General Motors Co.
Automaker General Motors Co. (GM) - Get General Motors Company (GM) Report is looking a bit sideways right now, but that's not necessarily a bad thing. In fact, the sideways grind that this stock has been stuck in since the end of November is actually setting shares up for a second leg higher in the weeks ahead. Here's how to trade it...
General Motors has been forming a "rectangle" pattern, a price setup that gets its name because it basically boxes in shares between a pair of horizontal resistance and support lines. For GM, the levels to watch are resistance up at $38 and support at $35. That setup makes General Motors an "if/then trade" right now. Put a different way, if GM breaks out through resistance at $38, then traders have a buy signal. Otherwise, if the stock violates support at $35, then the high-probability trade is a sell.
Consolidation setups like this one are common after big moves like the 36% rally that shares kicked off back at the end of June, and since GM's prior trend was up before shares started chugging sideways, a breakout above $38 is the more likely outcome. Shares are close to breakout territory here, but it's key to wait for shares to push through $38 before you actually buy it.
Things are looking pretty straightforward in shares of tech giant Microsoft Corp. (MSFT) - Get Microsoft Corporation (MSFT) Report. Since this past summer, Microsoft has been bouncing its way higher in a well-defined uptrend, bouncing its way higher every time shares have dipped to the bottom of their price channel. So, as MSFT closes in on that price floor for a seventh time here, it makes sense to buy the next bounce higher...
Microsoft's price channel is about as simple as price patterns get. The setup is formed by a pair of parallel trendlines that have managed to corral most of Microsoft's price action stretching back to the summer months. The next bounce off of trendline support is a low-risk, relatively high-reward opportunity to pull the trigger on this tech stock.
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 Microsoft can actually still catch a bid along that line before you put your money on shares. The 50-day moving average has started acting like a solid proxy for support—that makes it a logical place to park a protective stop on the MSFT trade.
Last on our list of stocks with breakout potential is mid-cap chemical company PolyOne Corp. (POL) - Get PolyOne Corporation Report. PolyOne hasn't done much of anything in the last six months—since August, this stock is all of 18 basis points higher than it started, missing out on a nearly 8% rally in the S&P 500 over that same timeframe. But here again, the sideways price action is setting shares up for a buy signal in February.
PolyOne has spent the last six months forming an inverse head and shoulders pattern, a bullish reversal setup that signals exhaustion among sellers. The 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 POL's neckline at the $35 level. Shares are squarely within grabbing distance of that price tag as I write.
Remember to be reactionary with this (or any other) trade. Technical analysis is a risk management tool, not a crystal ball; in other words, higher ground for shares doesn't become a high-probability trade until POL can muster the strength to break out above $35. With that in mind, the long-term nature of this stock's trading setup comes with long-term breakout implications once shares to crack that price level. Keep a close eye on $35 in the sessions ahead...
At the time of publication, author had no positions in the stocks mentioned.