BALTIMORE (Stockpickr) -- The week's not over yet, but already, the first few trading sessions of March have brought some wide-ranging price action.
Between the big drop on Monday, the "just kidding" breakout to new highs that stocks followed up with on Tuesday, and then yesterday's flat session, investors haven't gotten much of a hint so far at which direction the big indices are set to move in for March.
Today's macro-driven shove higher might help settle things, though.
With another test of new highs first thing this morning, March is providing some continuation of February's straight-up bounce higher (more on that in a minute). To take advantage of that bullish sentiment this week, we're hunting out a new set of must-see technical trading setups in five big-name charts.
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
First up, it makes sense to take a closer look at the bigger picture. Not only does the S&P 500 have a big impact on how most stocks move, but it's also been extremely tradable for the last 15 months. To figure out the next trade, we're using the SPDR S&P 500 ETF (SPY) as our proxy for the big index. As we dig into a new month, we're still very much in a "buy the dips" market. But we're far from a dip right now.
February's nearly straight-up price action has pushed SPY up to the top of its trading channel, a fact that indicates a correction is more likely than more nonstop gains in March. To be clear, corrections don't have to be straight down. Stocks can correct in price by falling lower, or they can correct in time by churning sideways for a while. And with so much pent up demand for stocks pressing equity prices against all-time highs, a sideways correction looks every bit as likely here.
Barring some kind of major news catalyst, we probably won't see a big move lower. But however SPY corrects, the optimal time to be a buyer again comes on a bounce off of trendline support.
Discover Financial Services
Credit card network Discover Financial Services (DFS) has a chart that looks a lot like the S&P 500 right now -- only better. DFS has been in an uptrend of its own over the last year, rallying more than 49% over a stretch where the S&P made less than half that. So, like with SPY, the best time to buy comes on a bounce off of support.
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 you're wrong). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring DFS can actually still catch a bid along that line.
When the time comes to buy, I'd recommend keeping a protective stop just below DFS' most recent swing low at $52.
Companhia Basileira de Distribuicao
Things are looking up for owners of Brazilian retailer Companhia Basileira de Distribuicao (CBD). After dropping 18% in the last year, CBD is starting to look "bottomy" in 2014. Here's why.
CBD is currently forming a double bottom pattern, a bullish reversal setup that's formed by two swing lows that bottom out at approximately the same price level. The buy signal comes on a push through resistance at $51. The long-term setup on CBD's chart comes with equally long-term trading implications when the breakout does happen.
Whenever you're looking at any technical price pattern, it's critical to think in terms of buyers and sellers. Pattern names like "double bottom" 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.
The $51 level is a price where there has been an excess of supply of shares; in other words, it's a place 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 it so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Keep an eye on that $51 price level in the sessions ahead.
Anyone who's bought Alcoa (AA) in the last six months probably feels pretty good right now. That's because shares of the aluminum giant have rallied more than 53% over that short stretch. But even if you missed the move higher in AA, it's not too late to think about being a buyer. Shares look ready to break out higher from here.
Alcoa is forming an inverse head and shoulders pattern, a bullish setup that indicates exhaustion among sellers. The pattern is formed by two swing lows that bottom out around the same level (the shoulders), separated by a deeper low (the head). A breakout above the neckline is the buy signal; AA's neckline is right at $12 and change. That means we could see a breakout signal in shares come in today's session.
Because of its commodity exposure, Alcoa tends to correlate less strongly with the S&P 500 than other large-cap names. That means that a breakout in AA makes for a stellar contra-stock trade at the exact same time that the big indices are bumping their heads on resistance. The 50-day moving average has been a good proxy for support on the way up that's where it makes sense to keep a protective stop.
We're seeing the same setup in shares of Nike (NKE) this week too. For Nike, the neckline level comes at $79, a price that the athletic apparel firm is pressing up against. The breakout above $79 is the signal that it's time to be a buyer in NKE.
Relative strength has been looking solid for Nike again in 2014, after turning lower at the end of last year. Since relative strength is the single most important indicator in any trader's toolbox when the broad market is in corrective mode, that's a big plus for Nike's ability to hold a breakout from here.
And lest you think that the head and shoulders is too well known to be worth trading, the research suggests otherwise: a recent academic study conducted by the Federal Reserve Board of New York found that the results of 10,000 computer-simulated head-and-shoulders trades resulted in "profits [that] would have been both statistically and economically significant."
That's good reason to keep an eye on both AA and NKE this week.
To see this week's trades in action, check out the Must-See Charts portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.