BALTIMORE (Stockpickr) -- With investors still grappling over the outcome of the latest Federal Reserve decision yesterday, we've got a lot of questions yet unanswered.
Questions like: "What flavor was Ben Bernanke's retirement cake?" (He sort of strikes me as a vanilla guy.) Or: "Did the Fed Governors chip in to buy him a nice watch?" (Probably not.)
Those are the questions worth asking in the wake of the Fed decision, because the decision to cut QE spending to $65 billion a month was about as shocking as discovering that MTV doesn't play music videos anymore. Not very. If the Fed backpedaled on the taper, it would send a pretty jarring signal to Mr. Market: This recovery is no where near as robust as we thought it was.
Likewise, the recent correction in the S&P 500 hasn't exactly been an epiphany either. Or it shouldn't have been. Want to position yourself on the right side of this leg down? Then it makes sense to think like a trader.
To do that, we're turning to the charts to take a closer look at the technical trading setups in five of Wall Street's biggest names.
If you're new to technical analysis, here's the executive summary.
Technicals are 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 high-volume stocks to trade this week.
SPDR S&P 500 ETF
Even though it hasn't been long since the last time we took a look at what's going on in the broad market, a lot has happened in a week. Specifically, more than three quarters of the S&P's year-to-date losses have happened.
So this big index is worth a closer look again. We'll do that through the SPDR S&P 500 ETF (SPY), the best investible proxy for "stocks" as a group.
Even though SPY is down, it's far from out. The big trend in the index is still up -- we're just seeing a correction within the trend channel this week. That's significant, because it means that SPY could fall another couple of points without even threatening the long-term trend. Translation: This is still a "buy the dips" market right now.
That changes if SPY can't catch a bid at trend line support, a level that's right below $175 on the big ETF. A breakdown would be a big deal for equity investors in 2014, but it hasn't happened yet. Expect $175 to get tested before buyers step back into stocks. And when they do, I for one will be buying with both hands.
Some stocks are staying a step ahead of the S&P in January -- and Wells Fargo (WFC) is one of them. The big bank is testing its own trend line support level this week, and you don't have to be an expert technical analyst to figure out why it's shaping up to be an attractive name. Even though the uptrend in WFC has been pretty short-lived, it's textbook.
The uptrending channel in Wells provides traders with a high probability range for shares to bounce between. Naturally, you want to be a buyer near the bottom of that channel and a seller near the top. When it comes to price channels, up is good and down is bad it's really just as simple as that. Wait for the next white bar day within the channel before clicking "buy."
Relative strength is in a strong uptrend of its own right now (on the lower subchart). That fact makes Wells Fargo statistically much more likely to outperform in the next three to ten months. As far as I'm concerned, relative strength remains the single most important indicator in any trader's toolbox while the market remains in correction mode.
We're seeing the exact same setup in shares of Priceline.com (PCLN) right now, just in the longer-term. Priceline is up more than 57.7% in the last 12 months, leaving the S&P 500's stellar year in the dust. Like Wells, a bounce off of support in Priceline is the signal to buy this name.
Why wait? Buying off a support bounce makes sense for two big reasons: its the spot where shares have the furthest to move up before they hit resistance, and its the spot where the risk is the least (because shares have the least room to move lower before you know you're wrong). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring PCLN can actually still catch a bid along that line. And once again, we've got a stellar relative strength uptrend in Priceline.
Canadian Natural Resources
$35 billion energy firm Canadian Natural Resources (CNQ) hasn't done much in the last year; shares are sitting only around 5% higher than they were 12 months ago. But that could be about to change thanks to a bullish price setup in shares.
CNQ is currently forming an ascending triangle, a bullish price pattern that's formed by horizontal resistance to the upside at $33.50 and uptrending support below shares. Basically, as Canadian Natural Resources bounces in between those two technically-important price levels, it's getting squeezed closer and closer to a breakout above that $33.50 resistance level. When that happens, we've got a buy signal.
That's not magic, mind you. Whenever you're looking at any technical price pattern, it's critical to think in terms of buyers and sellers. Triangles and other price pattern names are a good quick way to explain what's going on in this stock, but they're not the reason it's tradable. Instead, it all comes down to supply and demand for shares.
That resistance line at $33.50 is a price where there's an excess of supply of shares; in other words, it's a place where sellers have been more eager to take recent gains and sell their shares than buyers have been to buy. That's what makes the move above it so significant -- a breakout indicates that buyers are finally strong enough to absorb all of the excess supply above that price level.
This is a long-term price pattern with equally long-term trading implications; when shares push through $33.50, it becomes a high-probability trade.
Last -- and perhaps least -- is another big bank, JPMorgan Chase (JPM). While Wells Fargo is undeniably in an uptrend right now, JPM undeniably isn't. Instead, this banking giant is starting to look "toppy."
JPM is currently in the early stages of forming a head and shoulders top, a setup that indicates exhaustion among buyers. The pattern is formed by two swing highs that top out around the same level (the shoulders), with a higher high (the head) between them. At this point, JPM has its left shoulder and head formed, but investors should consider a breakdown below the neckline at $55 a sell signal regardless of whether the right shoulder is completed.
Momentum, measured by 14-day RSI, is adding some confirmation to the possibility of a move lower in JPM. The long-term momentum uptrend at the top of the chart broke earlier this month. It's still a bit premature to unload JPMorgan just yet, but if shares can't hold a bid above $55, it's time to sell (or short) it.
To see this week's trades in action, check out this week's Must-See Charts portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.