BALTIMORE (Stockpickr) -- "Mixed trading" has been the go-to phrase for market analysts in 2014 the S&P 500 index has managed to move up all of 1.3% as I write today, churning sideways for almost the last four straight months. In the context of the rip-roaring rally that stocks brought in 2013, that's a frustrating change of pace for most investors.
And institutions are reacting by pulling money out of the market.
It's hard to understate just how mediocre stocks have performed this year as an asset class. For example, if you'd bought 10-year U.S. treasuries at the start of the year, you'd be outperforming the S&P 500 by two and a half times without nearly the risk.
But the frustration over stocks is boiling over in May. And while the market averages continue to churn, big individual names are showing some very attractive trades again. That's why we're taking a technical look at trading setups in five of Wall Street's biggest stocks today.
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 big bank Wells Fargo (WFC - Get Report), a name that's been evolving into a solid trading setup in the last few months. With 8.8% returns since the calendar flipped over to January, Wells isn't just the best-positioned of the big four U.S. banks in 2014 -- it's also the sole member of the group that's not deep in the negative for the year. And the recent price action points to another leg higher in May.
Wells Fargo is currently forming an ascending triangle pattern, a bullish price setup that's formed by horizontal resistance above shares (just below $50) and uptrending support to the downside. Basically, as WFC bounces in between those two technically significant price levels, it's getting squeezed closer to a breakout above that $50 price ceiling. When that happens, we've got a buy signal in Wells.
Relative strength adds some important backup for a buy signal in WFC. That performance indicator has been in an uptrend since back in November, a signal that this big bank is continually outperforming the S&P in good times and in bad ones. As long as the broad market remains in "correction" mode, relative strength is the single most important indicator you can have in your trading toolbox.
We're seeing the exact same setup in shares of Unilever (UL), the $125 billion London-based consumer goods conglomerate. Like Wells Fargo, Unilever is forming an ascending triangle setup, in this case with a resistance level at $44.50. So, just like the last chart, a breakout above that $44.50 level is our buy signal.
Momentum, measured by 14-day RSI (not to be confused with relative strength), is the side indicator that's adding to the Unilever trade. RSI has been making higher lows since February, an indication that UL's upside momentum is outpacing its corrective days. Since momentum is a leading indicator of price, that's a good sign.
At first glance, it looks like UL's chart is full of price gaps. No, that doesn't mean that this name is especially volatile. Those gaps, called suspension gaps, are the result of off-hours trading on the Euronext and London Stock Exchange. From a technical standpoint, you can ignore them.
Unilever is somewhat unique in that it's a dual-listed company. For that reason, a similar setup is in play in Unilever (UN), the Rotterdam-based Dutch ADR, with a breakout level at $43.
You don't have to be an expert technical trader to figure out what's going on in shares of Microsoft (MSFT - Get Report) -- a quick glance at the chart will do. Microsoft is bouncing higher in a textbook uptrending channel, a setup that's about as simple as they get. So what do you do from here? Buy the bounce.
When it comes to price channels, up is good and down is bad. It's really just as simple as that. MSFT'ss channel is bounded by resistance above shares and trend line support below them; those two parallel trend lines provide a high probability range for shares of this stock to trade between. So with shares of the software giant moving down to test support for a fourth time since September, it makes sense to buy the next bounce off of trend line support.
If you decide to buy on the next leg up, I'd recommend keeping a protective stop right under MSFT's previous swing low at $35. This trend hasn't been particularly fast moving, but it could remain pretty persistent.
Cisco Systems (CSCO - Get Report) is another big tech name that's trending right now. Cisco spent the final half of 2013 trending lower, swatted down on every successive test of the red dashed resistance line on the chart. But that changed at the start of this year, when CSCO broke topside and started making higher lows.
That makes Cisco a "buy the dips" name worth watching in May, as shares come down to test support again. The last two similar scenarios have provided stellar risk/reward tradeoffs for buying Cisco, and the third has precedent on its side.
Like with Microsoft, the optimal time to be a buyer comes on a bounce off of trendline support. Why wait? Holding on is crucial 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 CSCO can actually still catch a bid along that line before you put your money on shares.
DaVita HealthCare Partners
Last up on our list of big-name trades is DaVita HealthCare Partners (DVA - Get Report), a name that's been consolidating sideways after staging a 21% move higher over the last six months. That sideways churn is setting the stage for a big leg up in May.
DaVita is forming a rectangle pattern, a price setup that's formed by a pair of horizontal resistance and support levels that basically "box in" shares between $70 and $67. Rectangles are "if/then patterns." Put a different way, if DVA breaks out through resistance at $70, then traders have a buy signal. Otherwise, if the stock violates support at $67, then the high-probability trade is a sell. Since DaVita's price action leading up to the rectangle was an uptrend, it favors a move to the upside through $70.
Why all of that significance at $70? It all comes down to buyers and sellers. Price patterns 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 DaVita's stock.
The $70 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 $70 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Wait for shares to catch a bid above resistance before you buy it.
To see this week's trades in action, check out the Must-See Charts portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.