These 5 Blue Chips Are Breaking Out -- Do You Own Them?
The S&P 500 may still be hovering around breakeven on the year, but the real number that investors should be paying attention to is 146. That's how many S&P components are up 10% or more year-to-date.
In other words, even though the broad market doesn't look like it's doing much right now, almost a third of the stocks that make up the S&P 500 are up double digits in 2016. Put simply, a very big chunk of the stock market is "working" right now, contrary to popular belief. Owning those breakout stocks is the key to trouncing the averages in 2016.
To take advantage of the secret strength in stocks this week, we're turning to the charts for a technical look at five big breakout stocks that are showing bullish trades this week -- 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.
ProLogis
Leading things off of $24 billion real estate investment trust ProLogis (PLD) - Get Report . Prologis has been a strong performer in the last few months; since shares bottomed back in February, this big REIT has rallied 30%, leaving the rest of the market in its dust. But don't worry if you've missed that upside move in ProLogis; shares look ready to kick off a second leg higher this month.
ProLogis is currently forming an ascending triangle pattern, a bullish continuation setup that's formed by horizontal resistance up above shares at $46, and utprending support to the downside. Basically, as Prologis bounces between those two technically important price levels, this stock has been getting squeezed closer to a breakout through our $46 price ceiling. When that breakout happens, we've got our buy signal in this stock.
Relative strength, which measures ProLogis' price performance vs. the rest of the stock market, is an extra indicator to keep an eye on here. That's because ProLogis' relative strength line is holding on to an uptrend since shares bottomed in February, an indication that this big REIT is continuing to outperform this spring. As long as that relative strength uptrend remains intact, expect to see continued outperformance from this stock.
Blackstone Group
We're seeing a similar price setup from asset manager Blackstone Group (BX) - Get Report this month. Like ProLogis, Blackstone is currently forming an ascending triangle pattern, in this case signaling that the uptrend in shares that kicked off in January is likely to continue as we head into the summer. For Blackstone, the big price level to watch is resistance up at $29.
What's so special about the $29 level? It all comes down to buyers and sellers. Price patterns, such as this ascending triangle pattern in Blackstone, 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 Blackstone's shares themselves.
The $29 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 $29 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
When shares are able to sustain a bid above $29, then it's time to join the buyers in Blackstone.
Monsanto
Monsanto (MON) hasn't exactly had a 2016 so far. This agricultural product stock started the year off in a downtrend, and shares are down more than 20% in the trailing 12 months. But it looks like the tide may finally be turning in Monsanto; this $40 billion agribusiness giant is beginning to carve out a long-term bottom that could trigger this week.
Monsanto has spent all of 2016 forming a rounding bottom, a bullish reversal pattern that looks just like it sounds. The rounding bottom indicates a gradual shift in control of shares from sellers to buyers, and it triggers with a breakout above the resistance level that's acted like a price ceiling over the course of the patter. For Monsanto, that's the $95 level. Zooming out on the chart a bit, Monsanto actually formed a similar setup last fall, shaping up to what could eventually be a very long-term double bottom setup with a longer-term breakout level at $100. Shares will need to take out 2016's $95 resistance level before buyers can think about trying for that longer-term line in the sand.
Momentum, measured by 14-day RSI up at the top of the chart, is the side-indicator to be watching for the Monsanto trade. Our momentum gauge has been trending higher over the course of the rounding bottom in shares (and even over the course of the longer-term double bottom that started last fall), which is a positive divergence that indicates buying pressure is building in this big stock.
If shares can catch a bid above $95, it's time to start buying shares of Monsanto.
Meanwhile, things are looking a whole lot simpler in shares of social media giant Facebook (FB) - Get Report . Facebook has been moving higher since the end of last summer, up almost 50% in a price pattern that's about as basic as they get. Over that timeframe, Facebook has been bouncing its way higher in a well-defined long-term uptrend -- and this social networking stock is still a "buy-the-dips stock" as we head into May.
The pattern in Facebook is formed by a pair of parallel trend lines that have managed to corral this stock's price action since last August. Every time Facebook's share price has tested trendline support, the subsequent bounce has provided an optimal entry from a risk/reward standpoint. From here, it makes sense to wait for that next bounce off of support.
Actually waiting for a 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 Facebook can actually still catch a bid along that line before you put your money on shares.
From a fundamental perspective, Facebook is a holding in Jim Cramer's Action Alerts PLUS charitable portfolio.
"In recent weeks, investors have been wary of the high expectations for FB heading into this print, but the company left nothing in question with its beats across the board and proved that tech isn't dead," wrote Cramer and Research Director Jack Mohr wrote last week following Facebook's earnings last week. "What did this quarter tell us? Don't bet against this management team because they have proved time and time again that they are leading this business on the right long-term path."
Morgan Stanley
Last up on our list of big-cap breakouts is $50 billion financial firm Morgan Stanley (MS) - Get Report . Like a lot of its other big financial sector peers, Morgan Stanley hasn't exactly been the sort of stock you'd want to own in 2016. Year-to-date, shares are down 17%, putting it in the top-tier of awful performers in the S&P right now. But the price action is finally pointing to a reversal in Morgan Stanley -- and now, a "throwback" is giving traders a second chance at a low-risk entry in this trade.
For most of 2016, Morgan Stanley has been forming a pretty textbook inverse head and shoulders pattern. The inverse head and shoulders is a price setup that signals exhaustion among sellers. You can spot the pattern 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 comes on the breakout above the pattern's "neckline." That neckline breakout happened when shares broke above $26 in the middle of last month.
After an initial pop higher, Morgan Stanley has been correcting, bleeding off some overbought momentum after the breakout in a price move called a "throwback." A throwback happens when a stock moves back down to test newfound support at its former breakout level -- in this case at $26. And while throwbacks look ominous, they're actually constructive for stock prices because they reverify the stock's ability to catch a bid at support.
If Morgan Stanley can bounce off of $26 this week, we've got a low-risk buy signal in this big financial firm. When that happens, the 50-day moving average becomes a logical place to park a protective stop.
Disclosure: This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.
