BALTIMORE (Stockpickr) -- The S&P 500 muscled its way above 2,000 for the first time ever on Monday, kicking down a conspicuous psychological barrier that's been on investors' minds in a big way in recent weeks.
So what's the significance of S&P 2,000?
Well, nothing really. It's just another number.
From a practical standpoint, the only notable difference between the S&P "up" at 2,000 and "down" at 1,999 is really just the number of zeros involved. And while I realize that's not the most exciting answer, the good news is that the latest big round-number target for the S&P didn't really need to matter anyway. We've been in a "buy-the-dips market" for the better part of the last two years, and more upside continues to look like the high-probability outcome from here. (We'll take a closer look at why that is in a moment.)
Better yet, the broad market's gains could be magnified in a handful of big individual names in the next month. So, to take full advantage of Mr. Market's rally mode, we're taking a technical look at five large-cap stocks to trade for gains this week.
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
To start off, it makes sense to take a closer look at the broad market. We'll do that with the SPDR S&P 500 ETF (SPY) , our best investible proxy for "stocks" as a group. It doesn't take a trading expert to figure out what's been going on in SPY for the last two years: This chart has been moving up and to the right in a well-defined uptrending channel.
As I mentioned a moment ago, the S&P has been the definition of a buy-the-dips market -- and that long-term trend line support level on the chart has helped traders identify exactly what a "dip" is. Every time the big index has tested support, it's been an extremely low-risk, high-reward opportunity to be a buyer.
Now, though, things aren't looking quite so enthusiastic. After moving up 4.7% since the end of our midsummer correction, the SPY is getting close to the top of its price channel again. Yes, the primary trend is still unquestionably up, but downside risk to the bottom of the channel is starting to outweigh upside potential to the top of the channel once again.
That doesn't mean you should sell, but it does mean that it makes sense to exercise some patience if you're looking for a low-risk buying opportunity for the S&P. The good news is that there's no shortage of individual trades breaking out right now.
There's a perfect example of that in shares of semiconductor stock Skyworks Solutions (SWKS) . Like the broad market, Skyworks has been bouncing its way higher in a well-defined uptrending channel. The big difference is that this stock's channel is shorter-term, and shares are looking buyable again this week.
As SWKS bounces off of trendline support for the sixth time since April, we're getting a good opportunity to scale into this momentum name. Actually waiting for this week's 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 SWKS can actually still catch a bid along that line before you put your money on shares.
We're getting confirmation of that upside potential from relative strength right now. That's because this stock's relative strength line has been in an uptrend since the middle of April, an indication that Skyworkds is outperforming the S&P 500 in good times and bad ones. As long as that uptrend remains intact, SWKS should keep doing better than the broad market.
The 50-day moving average has been a pretty good proxy for this uptrend over the course of this setup. That makes it a logical level to keep a protective stop; if shares violate the 50-day, you don't want to own SWKS anymore.
Vornado Realty Trust
2014 has been a great year for $20 billion real estate investment trust Vornado Realty Trust (VNO) . Since the calendar flipped to January, this large-cap landlord has rallied almost 20%. Don't worry if you missed the move, though; a bullish technical setup in VNO is signaling another leg higher in the second half of the year. Here's how to trade it.
VNO is currently forming an ascending triangle pattern, a setup that's formed by horizontal resistance above shares (in this case at $108) and uptrending support to the downside. Basically, as VNO bounces in between those two technically important price levels, it's getting squeezed closer to a breakout above that $108 price ceiling. When that happens, we've got our buy signal.
Why all of that significance at that level? It all comes down to buyers and sellers. Price patterns like the ascending triangle 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 Vornado's stock.
The $108 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 $108 so significant: The move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
International Business Machines
$192 billion tech giant International Business Machines (IBM) is the next name on our list of breakout trades. After some choppy price action to start the year, Big Blue is forming a classic bullish price pattern called a "cup and handle." Even though IBM's setup isn't exactly pretty, it's tradable.
The cup and handle 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 $195. That $195 level has been acting as resistance since April, swatting shares lower on the last four attempts through it -- and that's the context that should be coloring your trading decision if and when shares do break out. A move through $195 tells us that buyers are squarely in control in IBM.
After that happens, I'd recommend putting a protective stop in place below IBM's most recent swing low at $185.
Last, but certainly not least, is $15 billion industrial name Dover (DOV) . Dover is another name that's had pretty mixed trading since the start of the year – but price action has been much more constructive since the start of March, and it's all leading up to a classic bullish setup in shares of DOV.
Dover is currently in the final stages of forming an inverse head and shoulders pattern, a bullish setup that indicates exhaustion among sellers. You can spot the inverse head and shoulders by looking for 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 $90 resistance.
Typically, the inverse head and shoulders is a reversal pattern (which means that it shows up at the bottom of a downtrend, not the top of a rally), but you can throw away the trading "textbook" for now -- all that matters are the trading implications here. For DOV, the another rally leg becomes the high-probability trade if shares can crack resistance at $90. It's important to wait for confirmation on the $90 breakout; put another way, the move needs to be material. $91 has been a secondary price ceiling since July, so a close above that $91 level adds a lot of confidence that the breakout is the real deal.
To see this week's trades in action, check out the Must-See Charts portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.