BALTIMORE (Stockpickr) Stocks bounced big on Wednesday. The Nasdaq Composite managed to clear the 1% mark before the closing bell rang to end the session. The S&P 500 and the Dow Jones Industrial Average managed to climb a little more than half that. Put simply, it was a good day to be long.
But don't get drawn into the rhetoric. Yesterday's price action wasn't because of corporate earnings or the Fed or even the political world. Instead, the bounce was 100% technical. And that move is setting the stage for a lot more upside in August.
Just a week ago, stocks were in correction mode, and the S&P was closing in on its downside objective. So it shouldn't come as much of a surprise that the big index bounced hard when it hit long-term support. That's the exact same thing that's happened on every test of support?utm_source=inlinetst&utm_medium=cpc&utm_campaign=inlinetst" target="_blank">that support level over the last two years.
Even better, it's setting the stage for even bigger move in some of Wall Street's biggest names. Today, we're taking a technical look at five of them.
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 $64 billion Brazilian financial stock Banco Bradesco (BBD). Shares of BBD have been on fire in 2014, rallying more than 21% since the calendar flipped to January. Compare that with the U.S. financial sector, up 1.6% on average year-to-date, and the difference is staggering. But Banco Bradesco looks primed for even more upside in the second half of the year. Here's how to trade it.
BBD is currently forming an ascending triangle pattern, a bullish price setup that's formed by horizontal resistance above shares at $16, and uptrending support to the downside. Basically, as BBD bounces in between those two technically important price levels, it's getting squeezed closer to a breakout above that $16 price ceiling. When that move happens, we've got our buy signal.
Momentum, measured by 14-day RSI, adds another piece of evidence to the upside potential in BBD. Our momentum gauge has been making higher swing lows over the course of this setup, an indication that buying pressure is intensifying as BBD's price climbs. Since momentum is a leading indicator of price, that's a solid piece of confirmation to factor in ahead of the move through $16.
Pharmaceutical giant Merck (MRK) is showing traders the exact same setup right now. Like BBD, Merck is bouncing its way higher in an ascending triangle setup -- the main difference is that Merck's price action is longer-term. The buy signal comes on a move through resistance up at $59.
Why all of that significance at $59? 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 Merck's stock.
The $59 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 $59 so significant. The move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Remember, the longer-term price setup in MRK comes with longer-term trading implications after the $59 breakout takes place.
Goodyear Tire & Rubber
Shares of Goodyear Tire & Rubber (GT) haven't done much this year. Since the start of January, this tire giant has moved all of 3%. It may be hard to believe, but that sideways slug-out in Goodyear is actually the exact reason it's looking tradable this summer.
Goodyear is currently consolidating in a rectangle pattern, a price setup that's formed by a pair of horizontal resistance and support levels that basically "box in" shares between $28.50 and $24. Consolidations like the one in GT are common after big moves (like the one that started last summer); they give the stock a chance to bleed off momentum as buyers and sellers figure out their next trade.
Rectangles are "if/then pattern." Put a different way, if GT breaks out through resistance at $28.50, then traders have a buy signal. Otherwise, if the stock violates support at $24, then the high-probability trade is a sell. Since Goodyear's price action leading up to the rectangle was an uptrend, it favors breaking out above $28.50. It's crucial to wait for that level to get taken out before trying to jump into shares; more upside in GT isn't a high probability trade until buyers can muster the strength to take out the glut of supply up at $28.50.
Luckily, you don't have to be an expert technical trader to figure out what's going on in shares of banking giant Citigroup (C). Since the start of the summer, the price action in shares of Citi has been about as straightforward as it gets. And after correcting down to support for the last two weeks, it makes sense to buy this bounce higher.
Citi has been trading in a well-defined uptrending channel since the middle of April. The channel is defined by a pair of parallel trend lines that have identified the high-probability range for shares to trade within. Put simply, every test of that lower trend line since April has provided buyers with an optimal entry opportunity. And with the most recent bounce confirmed in yesterday's session, it's time to hit "buy" again in Citi.
Waiting for a bounce off of trend line support is a key risk management strategy for Citi 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, we've confirmed that Citi can actually still catch a bid along that line before you put your money on shares.
Last, but certainly not least, is packaging company MeadWestvaco (MWV). Packaging may not be the most exciting industry, but MWV's price action has certainly been action-packed in 2014: shares are up more than 14.5% since January, outperforming the venerable S&P by a factor of nearly three.
And shares look buyable again on a breakout above $44.
That's because MWV is in the early stages of forming an inverse head and shoulders pattern, a bullish setup that indicates exhaustion among sellers. Even though the setup in MeadWestvaco hasn't formed a full "textbook" inverse head and shoulders yet, it's still buyable on any violation of the $44 neckline.
The side-indicator to watch in MWV is relative strength, which measures this stock's performance versus the S&P. With an uptrend relative strength going back to the start of the year, 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, MWV should keep beating the rest of the market.
If you decide to buy the $44 breakout, I'd recommend keeping a protective stop at $43.
To see this week's trades in action, check out the Must-See Charts portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.