BALTIMORE (Stockpickr) -- Consumer stocks are making a comeback this summer -- and that's putting some tradable setups on our radar this week.
Consumer-driven names weren't a place you wanted to be just a few months ago. Back in May, consumer goods stocks were down more than 5% on the year, compared with modest gains for the rest of the S&P 500. But after a shaky second quarter, consumer discretionary stocks are showing signs of strength again thanks to upticks in spending. Now, on a relative strength basis, consumer discretionary is the best-positioned sector on the market today.
To take advantage of that reversal of fortunes for your portfolio, we're honing in on five consumer discretionary-driven stocks that are showing off big technical setups in August.
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.
Up first is VF Corp. (VFC), the $27 billion apparel name behind brands such as Wrangler, The North Face, Vans and Timberland. Year-to-date, VFC hasn't done much for shareholders -- the stock is up a measly 0.45% since the calendar flipped to January. But that sluggish performance looks like it's about to change thanks to a long-term price setup that's close to breaking out this week.
VFC is currently forming an ascending triangle pattern, a bullish price setup that's formed by horizontal resistance above shares (in this case at $63) 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 $63 price ceiling. When that happens, we've finally got a big buy signal in this stock.
VFC is a little trickier to trade than most ascending triangle setups. That's because the $63 resistance level is more of a range of resistance than it is a single discrete price barrier. As shares move through the top of that range, our confidence in the breakout grows. More nimble traders can feel comfortable buying the move through $63; but risk-averse traders should wait for $64 to get taken out before jumping in.
Either way, I'd recommend keeping a protective stop just below $60.
Streaming video service Netflix (NFLX) is another consumer discretionary name that's getting close to a big breakout this week. In this case, the price setup in play is a classic technical setup called a "cup and handle" pattern. The pattern is formed by a cup-shaped rounding bottom in shares that's followed up by a short-duration channel down. The buy signal comes on a move through the pattern's price ceiling at $460.
Why all of that significance at $460? 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 Netflix's stock.
The $460 resistance level is a price at which 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 $460 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. When the move happens, it makes sense to keep a stop just below the 50-day moving average.
Strictly speaking, Facebook (FB) may be a technology stock, but there's no question that its fortunes are inseparably fused to consumer spending. You don't have to be an expert technical analyst to figure out what's going on in shares of Facebook – the setup in shares of the social networking giant is about as simple as they get. Right now, FB is a textbook "buy the dips stock".
Facebook has been bouncing its way higher in a well-defined uptrending channel for the better part of the last year, moving higher on every successive test of trend line support. Put simply, every correction down to trend line support has given investors an optimal entry opportunity for buying shares, so, as FB comes off of support for a seventh time over the course of its price channel, it makes sense to buy this bounce higher.
For FB, the side indicator to watch is relative strength. Facebook's relative strength line has kept its uptrend intact since last September, a fact that means that this stock isn't just moving higher – it's also outperforming the S&P 500 along the way. As long as relative strength keeps making higher lows, this stock should keep beating the rest of the market.