BALTIMORE (Stockpickr) -- Stocks are looking springy to start this week following a less-than-inspiring performance for the first full week of July trading. After correcting 0.9% in the previous five trading sessions, the big indices turned bullish and took back half of that loss in yesterday's session alone.
That doesn't mean that investors should start indiscriminately buying. The S&P 500 is pressing up against the top of its multi-year price range this month. As the broad market sits within grabbing distance of all-time highs once again, it makes sense to turn your attention to the names that look the most likely to make moves in July.
That's why we're taking a closer technical look at five charts that look buyable this week.
For the unfamiliar, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
Without further ado, let's take a look at five technical setups worth trading now.
Royal Caribbean Cruises
Up first is Royal Caribbean Cruises (RCL), a name that's seen smooth sailing all year long. Since the start of 2014, Royal Caribbean has climbed more than 16% higher, nearly quadrupling the S&P's performance over that same stretch. From here, shares look primed to keep up their outperformance thanks to a textbook bullish price setup that started forming in RCL back in April.
Royal Caribbean is forming an ascending triangle pattern, a price setup that's formed by horizontal resistance above shares (in this case at $57) and uptrending support to the downside. Basically, as RCL bounces in between those two technically significant price levels, it's getting squeezed closer and closer to a breakout above that $57 price ceiling. When that happens, we've got a buy signal in shares.
Relative strength adds some serious backup to Royal Caribbean's breakout potential right now: this stock's relative strength line has been making higher lows for the past year or so, a signal that's statistically linked to outperformance on a rolling three-to-10-month window.
As long as that uptrend in relative strength stays intact, this name should keep outperforming the S&P 500.
We're seeing the exact same setup in shares of UK-based consumer products giant Unilever (UL) this week. Like Royal Caribbean, Unilever is forming an ascending triangle pattern, in this case with resistance up at $46. A breakout above $46 is the trigger to buy shares.
Why all the significance at $46? 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 reason a stock is tradable. Instead, the "why" comes down to basic supply and demand for Unilever's stock.
The $46 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 $46 so significant -- it means that buyers are finally strong enough to absorb all of the excess supply above that price level.
Wait for that breakout before you buy.
Content delivery network Akamai Technologies (AKAM) is another breakout trade to keep an eye on this week. Akamai has been a big mover in 2014, climbing 28% since the calendar flipped to January -- but most of the move came from an earnings-driven pop at the beginning of the year, and shares have failed to do much since then.
That could be about to change.
Akamai is currently forming a "rounding bottom" pattern, 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 chart. Even though AKAM's rounding bottom formed at the top of its recent price range (not the bottom), the trading implications are just the same: The buy signal triggered on a move through resistance at $63.
Mexican Coke bottler and distributor Coca-Cola FEMSA (KOF) has fared less impressively in 2014: year-to-date, shares are down around 5%. Zoom out to a full 12 months, and KOF's performance drops to 18% in the red. But after getting sold off hard for the last year, Coca-Cola FEMSA is starting to look "bottomy."
KOF is 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 pattern’s “neckline” level, currently right at $122 resistance.
Momentum, measured by 14-day RSI, is the confirming indicator to look at in this stock. Our momentum gauge has been making higher lows since last September, making its way higher in a shallow uptrend. Since momentum is a leading indicator of price, it adds some confidence to an upcoming breakout in KOF. When $122 gets taken out, it becomes a high-probability buy signal.
American Electric Power
Last up is American Electric Power (AEP), a $26 billion utility name that's been showing investors some solid performance for the better part of the last year. You don't need to be an expert technical trader to see why AEP looks attractive here; a look at the uptrend in the chart tells you pretty much everything you need to know.
AEP is a "buy-the-dips stock" this summer -- and we're coming on a dip this week.
The uptrending channel in AEP has provided traders with a high probability range for shares to trade within, and it's remained inviolate since last September. Each of those last nine tests of trend line support has provided a very opportune time to buy AEP -- and we're coming up on test number 10. But when it comes to uptrending channels, you don't just want to buy near trend line support. Instead, it's key to actually wait for a bounce higher off of the bottom of the trend line.
Waiting for a bounce off of trend line support is a key risk management strategy for AEP buyers for two big reasons: it's the spot where shares have the furthest to move up before they hit resistance, and it's also 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 American Electric Power can actually still catch a bid along that line before you put your money on shares.
To see this week's trades in action, check out the Technical Setups for the Week portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.