BALTIMORE (Stockpickr) -- Buckle your seat belts, folks. If this morning's early price action is any indication, investors are in for a rough ride. And an overwhelmingly positive earnings season isn't doing much to stop it.
So far, the early earnings results look good. Of the S&P 500 companies that have already reported their numbers, nearly 70% have posted positive earnings and sales surprises. But the broad market continues to look top heavy, and investor anxiety remains high. Frankly, being within grabbing distance of all time highs in the big stock indices doesn't change the fact that now is a difficult time to be an investor.
That doesn't mean that you've got to take your lumps as the market moves lower. Today, we're turning to five big technical trades that look primed to outperform as Mr. Market stumbles.
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
It makes sense to start with a look at what's happening in the big picture right now. To do that, we're turning to the SPDR S&P 500 ETF (SPY), the biggest investible proxy for "stocks" in general.
It may come as some surprise to hear that, from a technical perspective, nothing has changed in the S&P 500 index in nearly the last two years now. Over that stretch, the S&P has continued to bounce its way higher in a well-defined uptrending channel, and even though 2014's price action feels different from the nonstop rally we got last year, we're still in a textbook "buy-the-dips market."
In other words, every test of trend line support in the last 19 months has been a supremely low-risk opportunity to buy SPY, and every brush up against trend line resistance has been a good opportunity to either sell or reduce equity exposure. It's really just as simple as that. So with SPY pressing the top of its channel since the start of June, we look ready for a correction back down to the bottom of the channel.
One more recent signal that's come into play is the bearish divergence in RSI, our momentum gauge at the top of the chart. Higher prices on weakening momentum is typically a big red flag that price is about to reverse.
The broad market's context here is important: A correction isn't the same thing as a crash, and SPY could fall all the way to 187 today without threatening the long-term uptrend in stocks. So take smaller risk exposure up here, and get ready to buy the next support bounce in the S&P.
We're seeing the exact same setup in shares of Microsoft (MSFT) right now, but with one key difference: Microsoft's uptrend looks buyable this week. Granted, the uptrend in Microsoft hasn't lasted nearly as long as the one in the S&P 500, but the correlations between the $344 billion tech stock and the big index are ramping up this summer.
MSFT has been in a well-defined uptrending channel since mid-January, bouncing its way higher in between a pair of parallel trend lines that identify the high-probability range for Microsoft's stock to stay within. We're getting another important test of trend line support in today's session. Tat means that you should buy the next bounce higher.
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 MSFT can actually still catch a bid along that line before you put your money on shares.
I also featured Microsoft recently in "5 Dividend Stocks That Want to Pay You More in 2014."
Big pharma name Merck (MRK) has been a serious performer in 2014, rallying close to 17% since the calendar flipped to January. That's more than double what the S&P 500 has managed to accomplish over the same stretch of time. But that performance gap could widen this summer; Merck looks primed for a big breakout here.
Merck is currently forming an ascending triangle pattern, a bullish setup that's formed by horizontal resistance above shares (in this case at $59.50) and uptrending support to the downside. Basically, as MRK bounces in between those two technically important price levels, it's getting squeezed closer to a breakout above that $59.50 price ceiling. When that happens, we've got a buy signal in MRK.
Momentum, measured by 14-day RSI, adds some extra confidence to this setup. In spite of the sideways price movement since April, RSI is still making higher lows in the intermediate term. Don't jump in until price actually punches through $59.50 resistance.
For another take on Merck, check out "Cramer: Five of the Best."
Berkshire Hathaway (BRK.B) is another ascending triangle trade to keep an eye on this week. The breakout level to watch in Berkshire is just under $130 -- a price that shares have hit their head on twice since the beginning of May. A breakout above that $130 level is the signal that it's time to join the buyers in this stock.
Why all of that significance at $130? 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 Berkshire's stock.
The $130 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 $130 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. When it happens, I'd recommend keeping a protective stop just below the 50-day moving average.
Last, but not least, is Comcast (CMCSA). The cable and content giant has been turning out some lackluster performance in 2014, more or less remaining flat since January -- but zoom out a bit, and the price action suddenly looks a whole lot more constructive in this $142 billion name. Comcast may be a slow mover, but the rewards in the second half of the year could be worth the wait.
Comcast is currently forming a rounding bottom setup, a price pattern 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 chart. Even though Comcast'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 $55 price ceiling.
One final indicator to watch in CMCSA is relative strength. While Comcast's relative strength line spent most of the year trending lower as CMCSA underperformed the S&P, the downtrend broke at the end of May and began making higher lows. Statistically speaking, positive trends in relative strength make a stock likely to keep outperforming the broad market for the following 3-to-10 month window; that bodes well for Comcast buyers right now.
Wait for $55 to get taken out before you take this trade.
To see this week's trades in action, check out the Must-See Charts portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.