2016 isn't off to a great start. Only three trading sessions into the New Year, the big S&P 500 index is down 2.62%. Just to put that into perspective, if the calendar year unexpectedly ended today, 2016 would already be the worst year for stocks since the financial crisis of 2008.
No, it's not a particularly attractive picture for the stock market in 2016.
But that early price action in the S&P doesn't tell the whole story, either. While most stocks are down since the calendar flipped to January, 79 S&P components are actually up since 2016's first trading session. In short, a pretty large corner of the market is actually "working" in this challenging trading environment. And focusing on the big stocks that look primed for breakouts in January could be the secret sauce to dramatically outperforming everyone else this year.
To find strength in the stock market this week, we're taking a technical look at five breakout trades today.
First, a little 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 is UK-based electric and gas utility National Grid(NGG) - Get Report . National Grid has been making its way steadily higher for the better part of the last year, up more than 10% in the last three quarters or so. But don't worry if you've missed that move in National Grid. This $51 billion utility looks ready to kick off a second leg higher in 2016.
National Grid is currently forming a textbook ascending triangle pattern, a bullish price setup that's formed by horizontal resistance up above shares (at $71 in the case of National Grid) and uptrending support to the downside. Basically, as shares have bounced in between those two technically important levels since October, this stock has been getting squeezed closer and closer to a move about our $71 price ceiling. When that breakout happens, we've got our buy signal.
Relative strength (not to be confused with RSI at the top of the chart) adds some extra confidence to the upside in National Grid right now. That's because this stock's relative strength line is holding its uptrend line from last spring, indicating that shares are still beating the broad market in the long-term. If $71 gets taken out, it's time to be a buyer.
We're seeing the exact same setup in shares of datacenter REIT Equinix(EQIX) - Get Report . Like National Grid, Equinix has been forming a pretty textbook ascending triangle setup since October. Unlike National Grid, shares of Equinix are actually testing their breakout level today. A confirmed push above $305 is the move to watch in Equinix.
Why all of that significance at the $305 level? It all comes down to buyers and sellers. Price patterns, like this ascending triangle setup in Equinix, 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 Equinix's shares themselves.
The $305 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 $305 so significant – the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. If shares can hold above $305 for a second straight session today, consider the breakout buy signal confirmed.
The last year has been a challenge for shares of mid-cap industrial equipment maker Flowserve(FLS) - Get Report . In the last 12 months, Flowserve has lost about 32% of its market value, underperforming the rest of the market in the process. But after spending 2015 in selloff-mode, shares are entering 2016 looking "bottomy." Here's how to trade it.
In the very long-term, Flowserve is currently forming a double bottom pattern, a bullish reversal setup that looks just like it sounds. The double bottom is formed by a pair of swing lows that bottom out at approximately the same price level -- the buy signal comes on a breakout through the peak that separates those two troughs. For Flowserve, that breakout level to watch is resistance up at $48.
With shares hanging out near the bottom of that pattern, it could take a while before we see the next test of that $48 resistance level. In other words, patience is a virtue in this trade. That said, the long-term price setup in Flowserve comes with equally long-term trading implications once the breakout happens. That's good reason to keep this stock on your radar in 2016.
$78 billion Australian financial institution Westpac Banking(WBK) - Get Report is another stock that had a challenging run in 2015. Shares are nearly 30% lower than their peak prices from last spring. But Westpac is a little different. After correcting hard in the middle of last year, shares finally found a bottom back in August. Since then, Westpac has been a "buy the dips stock" -- and you don't need to be an expert technical trader to figure out why.
Since late August, Westpac has been bouncing its way higher in a well-defined uptrending channel. The uptrend is formed by a pair of parallel trendlines that have identified the high probability range for shares over that stretch. Put simply, every test of the bottom of that price channel so far has provided investors with a high-probability buying opportunity in Westpac Banking Corp. And shares are closing in on that level for a fifth time this week; that means that it's nearly time to hit the "buy" button again. Just be sure to wait for the bounce before you buy.
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, and you know you're wrong). Remember, all trend lines do eventually break, but by actually waiting for a bounce to happen first, you're ensuring Westpac can actually still catch a bid along that line before you put your money on shares.
Last up on our list of potential breakouts is financial market operator Nasdaq (^IXIC) . Nasdaq has been a strong performer in the last six months, up nearly 20% since the middle of the summer. But a non-typical technical pattern suggests that this big financial sector stock could have even further to go in 2016.
Nasdaq is currently forming an inverse head and shoulders pattern, a classic reversal setup that signals exhaustion among sellers. You can spot the inverse head and shoulders by looking for two swing lows that bottom out around the same level (the shoulders), separated by a bigger trough called the head; the buy signal came on the breakout above the pattern's "neckline." That's the $60 level in Nasdaq right now.
Typically, the inverse head and shoulders pattern is a reversal pattern that comes at the bottom of a downtrend, not a setup you'd expect to find at the top of an uptrend (like we're seeing with Nasdaq right now). But while this price pattern may not exactly be "textbook," the trading implications still are, provided shares can crack $60. It's important to be reactionary here and wait for the $60 breakout; Nasdaq doesn't become a high-probability buy until shares can catch a bid above that level.
Disclosure: This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.