BALTIMORE (Stockpickr) -- Typically, summer is the time of the year when Mr. Market hits the snooze button -- "summer doldrums," they call them. But as summer 2014 fast approaches, this year could bring a change in the market's normal M.O.
After all, we've been grinding through "spring doldrums" for the last couple of months, with major indices such as the S&P 500 and the Dow Jones Industrial Average slugging it out sideways amid very low volatility. And as the sideways churn drags on for a third month, we're ticking closer to a return to more directional trading this summer.
Why the change of pace? It's the individual stocks that make the market and right now, some of Wall Street's biggest names are leading the way with setups that are getting near a breakout. 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.
It's been a rough start to the year for General Electric (GE). Since the calendar flipped to 2014, shares of the $270 billion conglomerate have dropped 4.5%. But zoom into a shorter timeframe, and GE doesn't look so bad. Since the start of February, GE has actually rallied 6.5%, buoyed by a flight to yield that's shoved buying pressure behind shares. Now, GE looks well positioned for more near-term upside.
General Electric is currently forming an ascending triangle pattern, a bullish setup that's formed by resistance above shares at $27 and uptrending support to the downside. Basically, as GE bounces in between those two technically significant price levels, it's getting squeezed closer and closer to a breakout above that $27 price ceiling. When that happens, we've got our buy signal in GE.
Why all of that significance at $27? 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 General Electric's stock.
The $27 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 $27 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.
J.C. Penney (JCP) is another name that's been shoved lower this year. The biggest difference is that JCP's redeeming qualities are a little less obvious. In the trailing 12 months, this department store retail chain has dropped more than 51%, underperforming the broad market in dramatic fashion on big volume. But despite the selloff, JCP is starting to look "bottomy" right now.
J.C. Penney is currently forming an inverse head and shoulders pattern, a classic technical 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 bigger trough called the head; the buy signal comes on the breakout above the patterns neckline level, currently right at $9. That's a level that JCP has been flirting with for the last few sessions. Wait for a material move through $9 before jumping on this convalescing stock.
Momentum, measured by 14-day RSI, adds some extra evidence for an upside breakout in JCP. Our momentum gauge has been making higher lows since back in October, a period when price hasn't looked particularly bullish otherwise. Since momentum is a leading indicator of price, that's a very good sign.
Office supply firm Office Depot (ODP) is seeing big volume in May, trading significantly higher after first-quarter earnings got announced on May 6. You don't have to be an expert technical analyst to figure out what's going on in shares of ODP right now. After bouncing lower in a textbook downtrend, ODP has broken out topside. Often, an aborted bearish pattern like this is a more auspicious setup than an outright bullish one.
ODP's price channel swatted shares lower on the previous two attempts through trendline resistance. But that third attempt managed to absorb all the selling pressure along the trendline, shoving shares to new 2014 highs. While ODP has moved pretty far pretty fast, look for a buying opportunity after the weak hands take gains on this month's quick move up.
Momentum on ODP is well into overbought territory right now, and while it's tempting to think that's a reason to avoid this stock, that would be a mistake. Statistically, stocks that go overbought are more likely to get more overbought in the near-term that makes momentum a good confirming indicator this week, not a contrarian sell signal. Wait for bulls to establish some semblance of support again before you buy. Then, I'd recommend keeping a protective stop at the 200-day moving average.
Bank of America
If you've been following the headlines lately, there are plenty of reasons why you don't want to own shares of Bank of America (BAC) right now. Shares of the big bank are down 7% since the firm announced that it was suspending its dividend and buyback after an error in calculating the capital on its books. But it looks like the underperformance could be coming to an end this week.
Bank of America's problems actually started earlier, with a broken head and shoulders top pattern at the start of April. That pattern, the bearish opposite of the bottoming setup in JCP, sent shares on a downtrend that's only been propelled by earnings and the capital miscalculation. But after moving lower, BofA is testing a long-term support level that's halted selling in the past -- and that's creating a big buying opportunity for investors right now.
Despite the arguments against Bank of America, this stock's uptrend remains well defined. Put another way, it's a "buy the dips stock" -- and we're coming up on a dip. Wait for shares to move up off of support before buying.
A perfect example of that same setup in play is tech giant Microsoft (MSFT), a name that we looked at just last week. At the time, MSFT was coming down to test its own trend line support level, and the trade to take was to "buy the bounce."
Waiting for shares to bounce in MSFT or BAC 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 the stock can actually still catch a bid along that line before you put your money on shares.
So how do you trade Microsoft from here? Now that MSFT has put in its fourth bounce off of trend line support, it makes sense to be a buyer. The 50-day moving average has been a solid proxy for support. That's where I'd keep a protective stop in May.
To see this week's trades in action, check out the Must-See Charts portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.