5 Technical Setups to Kick Off May Trading

BALTIMORE (Stockpickr) -- The market gave us a tepid close for the first trading day in May as investors absorbed a slew of economic and geopolitical data. But even though most asset classes closed lower on Monday, there's reason to believe that the market could see additional upside this month.

Most significant is the major breakout that the S&P 500 made last week, plowing through its previous February high of 1,344 to close at a post-2008 high of 1,370.58 an hour into yesterday's market session.

Even though indices are moving higher, there's more to any move than just direction; market strength is another consideration. By and large, the S&P's ascent has been fueled by advances in the majority of issues, but we'll want to see strong hands push stocks higher (that is, through tougher resistance levels) in the near-term for this rally to stick.

Related: 5 Stocks Setting Up to Break Out

There's been no shortage of "news" attributed to Wall Street's moves lately, but taking a look at the technicals gives us a more tradable view of the market right now. That's why we're looking at a new set of technical setups for this week.

Remember, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's chart patterns 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.

Here's a look at this week's potential trades.

Vulcan Materials

2011 is proving thus far to be a fairly mixed year for shares of Vulcan Materials ( VMC), a $5.9 billion construction materials firm that primarily produces crushed stone, gravel, asphalt and concrete. The firm has seen just a 2.5% increase year-to-date, versus 8.24% from the broad market.

That said, Vulcan could be on the verge of a push higher if shares can clear an overhead price barrier.

That's because Vulcan is currently forming a bullish ascending triangle pattern, a formation that's characterized by a horizontal resistance level to the upside and uptrending support below. Each time shares of VMC have attempted to move above $47 in the past, they've been overwhelmed by supply of shares as sellers attempt to take gains and exit their trades -- but as increasingly emphatic buyers start edging closer to that $47 level, the potential for a breakout to the upside increases substantially.

For technical traders, the ideal entry point comes when shares successfully move above that $47 resistance level.

Vulcan, one of the top holdings of Wallace Weitz, is also one of 20 top-yielding materials construction stocks.

Roper Industries

Another ascending triangle setup comes in shares of Roper Industries ( ROP) this week. The company, which makes medical and scientific instruments, has been rallying hard over the course of the last year, generating 41% capital gains (in addition to a modest dividend payout) as improving fundamentals offered increased EPS to investors.

But in the short-term, this stock's ascending triangle is what's worth watching.

That ascending triangle pattern currently has resistance at $88. That's the price breakout traders will want to see take hold before this stock becomes a tradable play. With dual support at ROP's trendline and 50-day moving average, that requisite push above $88 comes with an attractive risk profile right now.

Even so, I'd suggest staying away from a position until the breakout actually happens.

Roper is one of TheStreet Ratings' top-rated electrical equipment stocks.

Reliance Steel

An ascending triangle isn't the only setup that's taking shape for investors right now. Equally appealing is the "channel up" forming in shares of Reliance Steel & Aluminum ( RS). Like the ascending triangles above, a channel up offers a high-probability trading setup, but also like the other trades, it requires buy discipline.

In the case of a channel, the ideal entry point comes when shares of a stock bounce off of the channel's support level. The operative word there is "bounce": It's not enough for shares to reach support; they also need to make a decisive move higher before it makes sense to take a position.

That's because, eventually, all trend lines fail. By waiting for a bounce, traders know that there's adequate demand for shares below support to spur a move back up to the top of the channel.

The fact that trend line support is currently the same price level as the 50-day moving average bodes well for RS. The existence of the 50-day only increases the strength of the support level.

Still, with a sharp move downward in this stock in yesterday's trading, it'll be crucial to wait for that bounce this week.

Reliance, which shows up in SAC Capital's portfolio as of the most recently reported period, is highlighted on a recent list of 10 Commodities Stocks With Upside.

Smithfield Foods

Another example of a channel setup comes from food processing firm Smithfield Foods ( SFD). Like Reliance above, Smithfield is a stock whose fortunes are invariably tied to the commodities market. As a result, this stock is a good option for investors seeking exposure to soft commodities and protection from inflation.

Related: 10 Consumer Goods Stocks to Watch

For traders, Smithfield's offering up a low-risk entry right now, with shares at the convergence of trend line support and the 50-day moving average. In 2011, Smithfield has been moving higher through a stair step pattern of breakouts followed by sideways consolidation. That structure makes an entry even more attractive for Smithfield given the organic support levels at each consolidation range.

As with Reliance, we'll want to see a bounce in shares before it makes sense to take a position in SFD.


Of course, not all of our technical setups are long-side plays. With Aecom Technology ( ACM), the technicals suggest that traders could be coming up on a good time to bet against shares. That's because ACM is forming a complex head-and-shoulders top, a bearish setup that's similar to the traditional head-and-shoulders pattern that's so well known by traders.

With ACM, the complexity comes from the fact that this firm is forming dual shoulders on each side of the formation's head. In practice, trading complex head-and-shoulders setups isn't much different from trading the regular setup; in both, we'll want to wait for a break below the neckline for the short-side play to trigger. Consider placing a protective stop just above the neckline if you do take this trade.

Aecom is one of TheStreet Ratings' top-rated construction engineering stocks.

To see these plays in action, check out the Technical Setups for the Week portfolio on Stockpickr.

-- Written by Jonas Elmerraji in Baltimore.


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At the time of publication, author had no positions in stocks mentioned.

Jonas Elmerraji is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.

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