BALTIMORE (Stockpickr) – The old mantra of "new month, new market" is holding very true again this summer, as investors scramble to play catch up with a stock environment that's caught a lot of portfolios by surprise this year.
Stock indices rallied in June, held flat in July, and they've corrected hard in August. But as I'll show you in a moment, the second half of this month could have much more constructive price action in store for market bulls.
In the meantime, there are some more positive trades setting up in some of Wall Street's biggest names. To find them, we're turning to the charts for a technical look at the high-probability trades in five large-cap stocks. 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 off with a look at the broad market – to do that, we're turning to the SPDR S&P 500 ETF (SPY), our best investible proxy for "the market." The last time we took a technical look at the S&P, the bid index looked ready to roll over. Sure enough, that's exactly what's happened since.
But the correction looks like it's coming to an end at this point. Remember, the SPY has essentially been a "buy the dips stock" for the last two years now; every test of trend line support on the way up has provided an optimal entry point for investors to buy stocks. So, as we approach our fifth test of trend line support in the last year, it makes sense to buy the next bounce off of support.
It's worth noting that, with the exception of the micro-correction in April, every test of trend line support has violated that lower blue line on an intraday basis. Those temporary capitulations from buyers tend to come with springier bounces higher for the rallies that followed, so that's something we'd like to see in August as well. If it happens, it would put the S&P around 1,880 (and SPY at 188) before kicking back into buy mode.
Momentum, measured by 14-day RSI, adds another piece of evidence to the correction in the S&P. Every previous correction to trendline support has been confirmed by a touch of the 35 level in RSI, and we're seeing a that momentum floor get hit here as well. If our momentum gauge reverses higher, it's a good indication that price is going to follow suit.
There's no question about it: We're still very much in a "buy-the-dips market" right now. You've just got to wait for the dip to get finalized in SPY.
Starwood Hotels & Resorts Worldwide
We're seeing a similar setup right now in shares of Starwood Hotels & Resorts Worldwide (HOT). Like the broad market, HOT is bouncing its way higher in a well-defined uptrending channel. Unlike the S&P, this hotelier has already seen shares bounce from their month-long correction, so now it makes sense to buy the bounce.
Waiting for a bounce off of trend line support is a key risk management strategy for HOT 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 Starwood can actually still catch a bid along that line before you put your money on shares.
The side-indicator to watch in HOT is relative strength, which measures this stock's performance versus the S&P. With an uptrend in HOT's relative strength line as well right now, this stock isn't just moving higher -- it's also outperforming the rest of the market at the same time. As long as relative strength keeps making higher lows, this stock should keep beating the rest of the market.
Wynn Resorts (WYNN) may share some aspects of its business with HOT, but this gaming stock is showing traders a very different chart setup this week. WYNN hasn't done much in the way of performance in 2014. Year-to-date, shares of the casino resort operator are only up 3%. But that could be about to change in August.
WYNN is currently forming an ascending triangle pattern, a bullish price setup that's formed by horizontal resistance above shares at $220 and uptrending support to the downside. Basically, as shares of WYNN bounce in between those two technical levels, they're getting squeezed closer to a breakout above the $220 price ceiling. When that happens, we've got our buy signal in this stock.
The 200-day moving average has just started acting like a pretty good proxy for support in this pattern – that makes it a logical place to park a protective stop when the breakout happens. Don't be early on this trade; higher ground isn't a high-probability outcome in WYNN until shares can catch a bid above $220. From there, look at prior resistance at $249 as an upside target.
Thermo Fisher Scientific
$48 billion scientific and medial equipment stock Thermo Fisher Scientific (TMO) is another blue-chip stock that's showing traders a textbook breakout trade this week. In the case of TMO, it's a classical technical pattern called a "cup and handle."
Don't let the goofy name fool you. The trading implications are pretty straightforward in TMO. The $126 level has been acting like a ceiling for shares going back all the way to the beginning of March, and this trade triggers when $126 gets taken out. Why all of that significance at $126? 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 TMO's stock.
The $126 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 $126 so significant. The move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
Last, but far from least, on our list of large-cap trades is Berkshire Hathaway (BRK.B). Warren Buffett may not be a fan of short-term trading, but the irony is that Berkshire has been extremely technically obedient for the better part of the last year. Now is no exception: a rectangle setup in shares is giving traders a very straightforward trade this week.
Berkshire's rectangle pattern is a consolidation setup that's formed by a pair of horizontal resistance and support levels that basically "box in" shares between $130 and $126. Consolidations like the one in Berkshire are common after big moves (like the one that started in February); they give the stock a chance to bleed off momentum as buyers and sellers figure out their next move. Support in this pattern is more of a range than a discrete level -- below $126, there's a secondary price floor at $124.
Rectangles are "if/then patterns." Put a different way, if Berkshire Hathaway breaks out through resistance at $130, then traders have a buy signal. Otherwise, if the stock violates support at $124, then the high-probability trade is a sell. Since this stock's price action leading up to the rectangle was an uptrend, it favors breaking out above $130.
-- Written by Jonas Elmerraji in Baltimore.