BALTIMORE (Stockpickr) -- The battle is on this week, as buyers and sellers exchange blows at a key long-term support level in the S&P 500.
Yes, the big index is down this week. Frankly, to most investors it feels like it's down a lot. But the S&P is actually only 5% and change off from the all-time highs it set earlier this year. The carnage on investors portfolios really isn't quite as bad as it may feel, and so as the S&P tests trend line support, we're still very much in a "buy the dips" market at this point.
And this certainly counts as a dip.
Of course, that doesn't mean that it's time to go buying with both hands again -- far from it. The dip isn't buyable until the S&P catches a bid higher (all trend lines do eventually break after all). But some big individual names aren't waiting for confirmation from the broad market. That's why we're taking a technical look at five new big-name trades this week.
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.
First up is TransCanada (TRP), a name that's been getting lots of attention over the Keystone XL debate that's been reigniting in the last few days. But in the meantime, this chart is painting a bullish technical picture that investors need to be paying attention to.
TransCanada is currently forming a long-term ascending triangle pattern, a setup that's formed by horizontal resistance above shares at $45.50 and uptrending support to the downside. Basically, as TRP bounces in between those two technical price levels, it's getting squeezed closer and closer to a breakout above $45.50. When that happens, we've got a buy signal in TRP.
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 $45.50 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.
We're seeing the exact opposite setup in another energy sector name: Chesapeake Energy (CHK). Chesapeake is currently forming a descending triangle, the bearish counterpart to the pattern in shares of TRP.
Support at $25 is the breakdown signal for this trade. If shares slip below that price level, then CHK has a lot lower to move before it hits its next-nearest support level.
Worst of all, relative strength looks anemic in CHK right now. The relative strength uptrend in shares gave way to a downtrend at the start of November, a fact indicates more underperformance is likely over the next three-to-ten month span.
With the S&P 500 still in corrective mode as I write, relative strength remains the single most important indicator in your technical toolbox.
Things look a lot better in O'Reilly Automotive (ORLY), and not just because shares are up a whopping 44% in the last 12 months. From here, ORLY is pointed higher thanks to a classic technical trading setup in shares. Here's how to play it.
O'Reilly is currently forming a cup and handle pattern, a classic bullish price setup that's formed by a cup-shaped rounding bottom in shares that's followed up by a short-duration channel down. The buy signal comes on a move through the pattern's price ceiling at $135. Shares have flirted with that $135 level a few times in the past; that'll make waiting for confirmation all the more critical for investors looking to get in with minimal risk.
You don't have to be an expert technical analyst to figure out what's going on in shares of Agilent Technologies (A), though. A quick look at the chart will do.
Agilent is currently bouncing higher in an uptrending channel, a price setup that's been in place since all the way back at the start of the summer. From a relative strength standpoint, this name has been holding up exceptionally well over that 6-month span, with shares catching a bid on every test of the 50-day moving average since August. Now, with shares testing the 50-day once again, it makes sense to buy the bounce.
Waiting to buy off a support bounce makes sense for two big reasons: It's the spot where shares have the furthest 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 you know youre wrong). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring Agilent can actually still catch a bid along that line.
Since the 50-day has been such a strong proxy for support all the way up, it's a logical spot to place a protective stop below.
Last up is McDonald's (MCD), a chart that looks nasty for all the same reasons that the setup in Agilent looks bullish. When it comes to trend lines, the price action doesn't get much simpler: up is good and down is bad. A glance at MCD tells you that things look pretty bad right now.
McDonald's has been in a downtrend since the second quarter of last year, getting batted lower every time shares have tested trendline resistance to the topside. Even though shares are sitting near the lower end of their channel right now, it still makes sense to stay away from the MCD trade. That's because price can consolidate along the bottom of the channel for a while (as it did in 2013) before heading up for another test of resistance.
Momentum, measured by 14-day RSI, adds some extra confidence to McDonald's broken chart. The momentum gauge has been in a long-term downtrend of its own for the better part of the last year, and it's looking far from oversold as we dig deeper into 2014. Buy the Golden Arches at your peril this month.
To see this week's trades in action, check out the Must-See Charts portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.