BALTIMORE (Stockpickr) -- Feel free to blink -- you're not missing much in the stock market in 2014. Since the first week of March, the big indices have basically flat lined, the S&P 500 budging all of 0.5% in the last two months and change.
Volatility remains extremely low this year, both on a statistical basis and an implied one through the VIX Volatility Index. While high volatility doesn't create a particularly good environment for investors, neither does none at all. And that's been a big contributor to the frustrating sideways grind that we've been caught up in for a while now.
Forgive the trite expression, but it's a "market of stocks, not a stock market". In other words, even while the market averages are doing nothing, there are some individual names that are showing investors attractive trading opportunities this summer -- big ones too.
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.
First up is $26 billion apparel name VF Corp. (VFC). At first glance, VFC hasn't done much itself in 2014. Year-to-date, shares are down 0.35%, a move so tiny that it doesn't even budge the average 401(k) balance by $300. But zoom out for a little context, and the setup in shares of VFC suddenly looks a whole lot more constructive.
VFC is currently forming an ascending triangle pattern, a bullish setup that's formed by horizontal resistance above shares at $64, and uptrending support to the downside. Basically, as VFC bounces in between those two technically important price levels, it's getting squeezed closer to a breakout above that $64 price ceiling. When that happens, it makes sense to be a buyer...
Shares have been flirting with that $64 price tag for a few weeks now, even pushing above it momentarily intraday. That's a good reminder of why waiting for a confirmed breakout is so important in VFC. Wait for a close above $64 before you click "buy."
We're seeing the exact same setup in shares of NXP Semiconductor (NXPI), the $15 billion Dutch chipmaker. Like VFC, NXPI is forming an ascending triangle pattern, in this case with a resistance level at $62.50. NXPI has made more progress this year, rallying more than 30%, followed by a shorter-term pattern in shares. When that $62.50 price level gets taken out, this stock is ready to add another leg to the rally.
Momentum, measured by 14-day RSI, went overbought the first time NXPI hit its head on that $62.50 resistance level, but our momentum gauge has been bleeding off ever since. Now, with momentum in neutral territory, this stock has ample run-up room before it starts to look overbought again.
Walt Disney (DIS) is getting close to a breakout of its own this week, driven by a setup of a different sort. Disney has shown investors some solid performance in the last year, rallying more than 23% over the trailing 12 months. And while shares have stayed sideways since March, that sideways consolidation is exactly what makes Disney tradable right now.
Disney 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 above $83.
Typically, the inverse head and shoulders is a reversal pattern that shows up at the bottom of a downtrend. While Disney's setup doesn't fix that textbook mold, the trading implications are every bit the same if shares can catch a bid above $83. Why all of that significance at that level? 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 Disney's stock.
The $83 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 $83 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.
Discover Financial Services
You don't have to be an expert technical analyst to figure out what's going on in shares of Discover Financial Services (DFS) -- a quick look at the chart will tell you everything you need to know about this $26 billion payment network. DFS has been bouncing its way higher in a textbook uptrend since last summer, staying stuck between a pair of trend lines that provide a high-probability range for shares to stay stuck within.
Now, as DFS tests trend line support for the ninth time over the course of this uptrend, it makes sense to buy the bounce.
Waiting for shares to bounce in DFS 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.
Last up is L-3 Communications (LLL), a name that's in a long-term uptrending channel much like the one in Discover. Shares of L-3 have been bouncing their way higher since last July, staying constrained between a pair of parallel trendlines all the way up. And now, with shares testing support for a sixth time, it makes sense to buy the bounce for the exact same reasons we covered in DFS.
Relative strength adds some important backup for a buy signal in LLL. That performance indicator has been in an uptrend since last summer, a signal that this stock is continually outperforming the S&P in good times and in bad ones. As long as the broad market remains in a sideways correction, relative strength is the single most important indicator you can have in your technical toolbox.
If you buy the next bounce in LLL, I'd recommend keeping a protective stop underneath this stock's most recent swing low at $112.50. If that level gets broken, so is the uptrend...
To see this week's trades in action, check out the Must-See Charts portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.