BALTIMORE (Stockpickr) -- After opening lower at the open on Wednesday, S&P 500 pulled out a surprise gain in yesterday's session, adding on to the broad-based rally that kicked off at the start of May. There's no question that buyers are still very much in control here, even if the S&P is getting close to the top of its long-term price channel.
But that hasn't stopped investors from getting anxious about performance this summer. In fact, a quick news search for the term "summer doldrums" brings up more than 6,500 results just from the last few weeks. Perception isn't reality for nail-biting investors right now. In fact, 2014 has brought the second-best May-to-June rally in the last decade with 3.79% gains. The best was 2009 with 4.87%.
How's that for summer doldrums?
To take advantage of the disconnect between perception and performance this week, we're turning to the charts to find five big-name stocks that look ready for a summer breakout.
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.
Up first is asset management giant BlackRock (BLK), a name that's been meandering sideways for most of 2014. While the broad market has pushed its way more than 6% higher year-to-date, BLK has barely budged 0.2%. But that sideways consolidation is setting up the basis for a breakout this summer. Here's how to trade it.
BlackRock is forming an ascending triangle pattern, a bullish price setup that's formed by horizontal resistance above shares (at $320 in this case) and uptrending support to the downside. Basically, as BLK bounces in between those two technically important price levels, it's getting squeezed closer to a breakout above that $320 price ceiling. When that happens, we have our buy signal in this stock.
Momentum, measured by 14-day RSI, adds some extra confidence to this setup. In spite of the sideways movement this year, RSI is still making higher lows in the intermediate term. That uptrend in our momentum gauge favors an upside breakout over a move lower in the coming weeks.
We're seeing the exact same setup right now in defense contractor Lockheed Martin (LMT). Lockheed has posted some more impressive performance in 2014, rallying almost 10% since the calendar flipped to January -- but shares look ready for another leg higher thanks to the ascending triangle trade that's been forming since March. The breakout level to watch in LMT is $168; if that level gets taken out, LMT becomes a high-probability buy.
Why all of that significance at $168? 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 Lockheed's stock.
The $168 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 $168 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
$22 billion genetic testing stock Illumina (ILMN) is enjoying some blockbuster performance this year: in those last six months, ILMN has climbed more than 54.5% higher. In March, shares hit a resistance level at $180 and reversed lower, dropping down to $130 as owners took gains on shares of Illumina. But that drop doesn't mean that the rally is over. A "rounding bottom" setup in the last few months points to a second leg to ILMN's rally.
ILMN's rounding bottom is a price setup that indicates a gradual transition in control from sellers to buyers. The pattern's name is a pretty good description of how it looks on a charr. Even though Illumina's rounding bottom came in at the top of its recent price range (not the bottom), the trading implications are just the same. The buy signal triggers on a move through our $180 price ceiling.
From a risk-management standpoint, the line in the sand in ILMN is down at the bottom of the setup at $130. If shares violate that floor, then the upside setup gets invalidated. For that reason, $130 a perfect place to keep a protective stop. After all, if shares are able to fall below that level, you don't want to own Illumina anymore.
You don't need to be an expert technical trader to figure out what's going on in shares of paper maker Kimberly-Clark (KMB). A quick look at the chart should be enough to tell you everything you need to know about shares of KMB: As we head into July, it's a "buy the dips stock."
KMB has been in a well-defined uptrending channel since the start of the year, bouncing its way higher in between a pair of parallel trend lines that identify the high-probability range for KMB's stock to stay within. When it comes to trend channels, up is good and down is bad -- it's really just as simple as that. So as this stock tests trend line support for the seventh time since this pattern came into play, it makes sense to buy the next bounce off of support, a signal we could see as soon as today.
If you decide to jump in here, it makes sense to keep a protective stop on the other side of that lower trend line. If it gets taken out, the pattern is broken and you don't want to own KMB anymore.
Hertz Global Holdings
Hertz Global Holdings (HTZ) is another uptrending channel that's in play this week. Like KMB, Hertz has been bouncing its way higher in an uptrending channel since the beginning of the year. Now the next high-probability buying opportunity comes on a bounce off of trend line support.
Waiting for a bounce is important for two key 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 HTZ can actually still catch a bid along that line before you put your money on shares.
Relative strength is the confirming indicator to watch in HTZ right now. The relative strength line has been making higher lows since the uptrend in Hertz started, an indication that this stock isn't just trending higher -- it's also outperforming the S&P 500 over the same stretch. Statistically speaking, relative strength outperformers are likely to keep beating the broad market on a 3-to-10-month time horizon. That bodes well for HTZ shareholders this summer.
To see this week's trades in action, check out the Must-See Charts portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.