5 Commodities Setups to Play

BALTIMORE (Stockpickr) -- Stocks made big gains yesterday, the big NASDAQ Composite in particular making new multiyear highs as buyers charged into equities to start the week. But one corner of the market has quietly been outperforming the rest -- and no, it's not technology.

I'm talking about the "commodity stocks," basic materials sector names with outsized exposure to the commodity markets. Typically, commodity-centric names tend to have low correlations with the rest of the broad market, but not in 2014. Instead, materials names are just magnifying the S&P 500's gains this year.

So far, the S&P has managed to climb 7.19% higher since the start of the calendar year -- but the basic materials sector has basically done double, climbing 14.34% over that same stretch. Even better, there are still some big trading opportunities in materials right now.

To sniff out the best setups, we're turning to the charts for a technical look at five big commodity-driven names to trade 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 Dutch Shell

First up is Royal Dutch Shell (RDS.B) , a name that's a perfect example of the outperformance in the commodity stocks this year. Since the first trading session in January, Shell is up more than 12.6% -- and now, this stock is close to making another leg higher in the near-term. Here's how to trade it...

Shell looked a little "toppy" earlier in the summer, but the downside move never triggered. Instead, this setup evolved into a textbook ascending triangle trade. The ascending triangle is a bullish price pattern that's formed by horizontal resistance above shares at $87 and uptrending support to the downside. Basically, as RDS.B bounces in between those two technically significant price levels, it's getting squeezed closer to a breakout above that $87 price ceiling -- when that happens, we've got our buy signal.

It's important not to be early on Shell; it's not a high-probability trade until shares can clear that $87 barrier. Once that happens, it makes sense to park a protective stop on the other side of $82.

Vale SA

Brazilian metals miner Vale SA (VALE) is showing traders the exact same setup as the one in Shell, but with a key twist: this stock's ascending triangle pattern is coming in at the bottom of its recent range, not the top. Either way, the trading implications are just the same. The buy signal comes on a breakout above $15 resistance.

Why all of that significance at $15? 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 Vale's stock.

The $15 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 $15 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.

Momentum, measured by 14-day RSI, is the confirming indicator to look at in this stock. Our momentum gauge has been making higher lows over the course of the setup -- since momentum is a leading indicator of price, it adds some confidence that buyers are starting to step into VALE. Don't go long until $15 gets taken out...

Alcoa

Alcoa (AA) has been the poster-child for commodity-driven gains in this year -- and the good news is that you don't need to be an expert technical trader to see why. Alcoa has been bouncing its way higher in an uptrending channel for the last year, showing investors a setup that's about as simple as they get. Now, as shares test trendline support once again, AA looks buyable.

Alcoa's trend channel is made by a pair of parallel trendlines that have identified the high-probability range for shares of this aluminum manufacturer to trade within since last October. Put simply, every correction down to trendline support has given investors an optimal entry opportunity for buying shares, so this latest bounce looks like a logical time to be a buyer once again.

For AA, the side indicator to watch is relative strength. Alcoa's relative strength line has kept its uptrend intact since last October, 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. If you decide to be a buyer here, the 50-day moving average is a logical place for a protective stop.

NuStar Energy

San Antonio-based NuStar Energy (NS) is another name that's been bouncing its way higher in a textbook uptrending channel. In NuStar's case, the pattern has been in play since the beginning of February -- now, as shares test support for an eighth time over the course of this uptrend, it's time to buy this bounce.

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 NS can actually still catch a bid along that line before you put your money on shares.

The 50-day moving average has been a nearly perfect proxy for support on the way up in NuStar too -- that makes it a good place to park a stop loss. After all, if the 50-day gets violated, then you don't want to own NS anymore...

Alpha Natural Resources

2014 hasn't been a particularly strong year for shareholders in coal firm Alpha Natural Resources (ANR) . In fact, it's been downright horrific, with shares selling off more than 45% since the calendar flipped to January. But that selling could be coming to an end this month -- ANR is starting to look "bottomy" in August.

ANR is currently forming a double bottom, a bullish reversal pattern that's formed by a pair of swing lows that bottom out at approximately the same price level. Yes, this setup looks just like it sounds. The buy signal comes on a push through the resistance level that separates those two lows. For ANR, that breakout level to watch is $4 -- shares are testing out a move through that level this week.

Momentum adds some extra confidence in ANR's upside right now: 14-day RSI has been making higher lows, even as its share price re-tested support at $3.25. That's a good indication that buyers are getting more aggressive in this stock in August. When ANR can catch a bid above $4 again, it's a buy.

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.

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At the time of publication, author had no positions in stocks mentioned.

Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.

Follow Jonas on Twitter @JonasElmerraji

Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes, Investor's Business Daily and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation. Follow Jonas on Twitter @JonasElmerraji.

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