If market seasonality is any indication, October can't come quick enough. Historically, September is a challenging month for stock market investors -- but it ushers in a season that's typically paired with strong market performance.
The fall months are historically strong for stocks. In fact, since 1980, November and December have actually been the best months of the year for market performance, on average. And while October has brought on some notable market drops (such as in 2008 and 1987), it's still also a positive month for the S&P 500 over the long run.
Put simply, now could be a great time to ramp up your stock ownership. To find the trades that pose the best payout potential this fall, we're turning to the charts for a technical look at five stocks that are breaking out.
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.
Leading off the list is $15 billion industrial automation firm Rockwell Automation (ROK) - Get Report . 2016 has been a solid year so far for Rockwell. This stock is up almost 12% since the calendar flipped to January, besting the rest of the S&P 500 by a factor of more than two.
But don't worry if you've missed that momentum in shares of Rockwell. Shares look ready to kick off a second leg higher this fall.
Rockwell Automation is currently forming an ascending triangle pattern, a bullish continuation setup that's formed by horizontal resistance up above shares at $120, and uptrending support to the downside. Basically, as Rockwell bounces between those two technically significant price levels, shares have been getting squeezed closer and closer to a breakout through their $120 price ceiling. Once that happens, we've got a buy signal.
Relative strength is the important side indicator to look out for in shares of Rockwell. Relative strength measures this stock's price performance vs. the rest of the broad market. It signals that ROK has been beating the S&P since January, a trend that is statistically likely to result in a continued stretch of outperformance as we head into the final months of 2016.
Keep a close eye on $120. Once it gets taken out, it's time to buy Rockwell Automation.
Rockwell isn't the only big stock that's showing off a continuation pattern this fall. In fact, we're seeing the exact same setup in shares of mid-cap boat company Brunswick (BC) - Get Report . Like Rockwell, Brunswick is currently forming an ascending triangle pattern, in this case with resistance up at the $51 level.
What makes $51 matter so much? It all comes down to buyers and sellers. Price patterns, such as this ascending triangle setup in Brunswick, 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 Brunswick's shares themselves.
The $51 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 $51 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
Envision Healthcare Holdings
Meanwhile, it's been a tough summer for shareholders of $4 billion health care company Envision Healthcare Holdings (EVHC) . Since shares peaked back in June, this stock has shed more than 20% of its market value. That's the bad news. The good news is that after a prolonged stretch of underperformance, Envision is finally looking "bottomy" in the near-term.
Envision is forming a double bottom pattern, a reversal setup that looks just like it sounds. The pattern is formed by a pair of swing lows that bottom out at approximately the same price level. They're separated by a peak that designates the resistance level for the pattern - in Envision's case it comes in at the $23 level. If shares can manage to catch a bid above $23, then the downtrend is over, and it's time to join the buyers again.
Momentum, measured by 14-day RSI up at the top of the chart, is the side-indicator to be watching for the Envision trade. Our momentum gauge has been trending higher over the course of the double bottom in shares, a positive divergence that indicates buying pressure is building in this health stock.
Keep a close eye on how shares trade in the sessions ahead. Envision is hovering within striking distance of $23.
Simon Property Group
Things are pretty straightforward on the chart of $67 billion REIT Simon Property Group (SPG) - Get Report . This big mall landlord has been in a well-defined uptrend all year long, climbing 21% higher on a total returns basis since the calendar flipped to January. And now shares are showing traders a big buying opportunity this week.
Simon Property Group's uptrend has been identified by a pair of parallel trend lines that identify the high probability range for shares to stay stuck between; every time Simon's share price has tested trend line support, the subsequent bounce has provided an optimal entry from a risk/reward standpoint. Shares touched support most recently last week, and they're bouncing higher here. That bounce is our buying opportunity.
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 SPG can actually still catch a bid along that line before you put your money on shares.
Sliding down the market cap scale brings us to small-cap biotech stock Pfenex (PFNX) - Get Report . Pfenex has been under serious pressure for the last year, selling off almost half of its market value in the trailing 12 months. But long-suffering shareholders could finally be in store for a reprieve. That's because Pfenex is showing off a long-term reversal pattern. Here's how to trade it.
Pfenex is currently 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 comes on a move through Pfenex's neckline up at $11.
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 Pfenex can muster the strength to break out above $11.
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 $11.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.