New month, new market? That's the question investors should be asking today as the calendar flips over to September.
Typically, September is associated with a return to upside moves. It's the month you start buying stocks again if you subscribe to the old adage of "sell in May and go away." That's not to say that September is historically an outright bullish month for stocks; most statistical studies of stock market seasonality actually show that September is one of the few months that tends to be negative, on average.
But in the last 20 years, September performance in the big S&P 500 index has been pretty evenly split between bullish and bearish years. It's just that, while the up years have been big, the down years tend to be bigger when they do occur.
From a trading perspective, that increased volatility in the stock market spells an opportunity. To take advantage of it this month, we're turning to the charts for a look at five stocks that are teetering on the edge of breakout territory. Today, we'll take a closer look at what the price action is saying about them - and when you should buy.
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.
Apartment Investment and Management
Up first on our list today is $7 billion real estate investment trust Apartment Investment and Management (AIV) - Get Report , better known as Aimco. This residential housing REIT has been a stellar performer in 2016, up almost 13% on a price basis since the calendar flipped to January. But don't worry if you've missed the move in Aimco. This stock could be about to kick off a second leg higher in September.
Aimco is currently forming an ascending triangle pattern, a bullish continuation pattern that's formed by horizontal resistance up above shares (at $46) and uptrending support to the downside. Basically, as Aimco bounces between those two technically significant price levels, shares have been getting squeezed closer and closer to a breakout through their $46 price ceiling. When that happens, we have our high-probability buy signal in this stock.
Relative strength, which measures Aimco's performance versus the rest of the broad market, is looking bullish here. Our relative strength line has been forming an uptrend since December, indicating that Aimco is still beating the rest of the market, even now. Once $46 gets taken out, it's time to buy.
We're seeing the exact same price setup in shares of $5 billion restaurant stock Panera Bread (PNRA) . Like Aimco, Panera is currently forming a textbook example of an ascending triangle pattern. For Panera, the big buy signal comes on a push above resistance up at $220.
What's so special about the $220 level? It all comes down to buyers and sellers. Price patterns, such as this ascending triangle setup in Panera Bread, are a good quick way to identify what's going on in the price action, but they're not the actual thing that makes the stock tradable. Instead, the "why" comes down to basic supply and demand for PNRA's shares themselves.
The $220 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 been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above $220 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
Once Panera manages to definitively move above $220, we've got a signal that buyers are back in control of the price action -- and that it's time to join them.
Overall, in a fragmented restaurant space, we are confident Panera will continue to be a winner. Management has gotten ahead of the important consumer trends and are now executing on their well-calculated plans. We are excited for what's to come.
Fiesta Restaurant Group
Sliding down the market cap spectrum brings us to another restaurant stock that's on the verge of breakout territory: Fiesta Restaurant Group (FRGI) - Get Report . 2016 has been a tough year for shareholders in Fiesta. Since the calendar flipped to January, this fast-casual restaurant operator has shed almost a quarter of its market value. But the end of the selling looks like it's finally in sight, and Fiesta looks "bottomy" as we head into September.
Fiesta Restaurant Group is currently forming a rounding bottom pattern, a bullish reversal setup that looks just like it sounds. The rounding bottom indicates a gradual shift in control of shares from sellers to buyers -- and it triggers on a push through the price ceiling that constrains the top-side of the pattern. For Fiesta, that big breakout level to watch is resistance up at $26, a price level that's finally getting tested this week.
Price momentum is another important indicator to watch in Fiesta Restaurant Group. 14-day RSI, our momentum gauge in this stock, has been making a series of higher lows since the rounding bottom first started forming back in May. That's a bullish divergence that signals buyers are building strength here. Once $26 gets taken out, it's time to buy.
Switching gears away from restaurant stocks brings us to biopharma giant AbbVie (ABBV) - Get Report . It hasn't been hard to figure out what's been going on in shares of this $104 billion pharma stock so far this year. In fact, the price action in this stock has been about as simple as it gets. AbbVie is a "buy-the-dips stock" right now -- and it's showing investors another buyable dip as we head into September.
The price pattern in play with shares of AbbVie is an uptrending channel. That uptrend is formed by a pair of parallel trendlines that have corralled effectively all of this stock's price action going back to AbbVie's January lows. So far, every test of the bottom of AbbVie's price channel has provided investors with a low-risk, high-reward opportunity to build a position in this stock. And as shares touch trend line support for a sixth time this week, it makes sense to buy the next move higher.
Actually waiting for the next 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 a bounce to happen first, you're ensuring AbbVie can actually still catch a bid along that line before you put your money on shares.
Last, but not least, on our list of potential breakout movers for September is payments giant MasterCard (MA) - Get Report . MasterCard has done a whole lot of nothing in 2016. Year-to-date, this stock is down 0.75% -- more or less flat. But zoom out a bit on the chart, and that sideways grind actually starts looking a whole lot more constructive for investors this fall. Here's why.
MasterCard has spent the last few months forming an inverse head and shoulders pattern, a bullish price 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 comes on a move through MasterCard's neckline up at $98. Shares are within grabbing distance of that neckline level as of this writing.
The price pattern in MasterCard isn't exactly textbook. Typically, an inverse head and shoulders pattern is a reversal pattern that comes at the bottom of a selloff, not the top of an uptrend. But even though the price action isn't typical, it's tradable. So if $98 gets taken out, we've got a signal that it's time to buy shares.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.