BALTIMORE (Stockpickr) -- Yesterday was an ugly day for stocks -- and not because of the 0.8% drop in the S&P 500. Even though that drop wasn't pretty, the big index has already had a dozen and a half worse single-day declines in 2014.
No, that 0.8% number didn't come close to telling the whole story of the selloff.
One out of every eight S&P components sold off more than 2% yesterday. And in the tech-heavy Nasdaq 100, one out of every four stocks was down more than 2%. That's a bloodbath, especially when you consider that it followed a similar session on Friday.
So how do you avoid the next big down day? Buy the big stocks.
Staid blue-chip names have avoided most of this selloff thanks to a flight to quality that's been punishing this year's most conspicuous momentum names in recent sessions. More important, a handful of large-cap names are even pointing towards breakout moves in September.
To take advantage of that shift in stocks, we're taking a closer technical look at five blue-chip stocks to trade for gains in September.
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 tech giant Google (GOOGL) , a stock that's looked pretty lackluster since the calendar flipped to 2014. Yes, Google has underperformed this year, and yes it's a tech stock (a sector that's selling off this month), but neither of those factors outweighs the bullish setup that's been forming in shares since August. Instead, Google looks ready for a breakout here.
GOOGL is currently forming an ascending triangle pattern, a bullish setup that's formed by horizontal resistance above shares at $609 and uptrending support to the downside. Basically, as Google bounces in between those two technically important price levels, it's getting squeezed closer to a breakout above that $609 price ceiling. When that happens, we've got our buy signal.
For folks trading GOOG, the Class C shares, the equivalent breakout level to watch is $599.
When the breakout happens, it makes sense to keep a protective stopprotective stop underneath GOOGL's most recent swing low at $580 (or $570 if you're trading GOOG). If that level gets violated, then the pattern is broken and you don't want to own it anymore.
For another take on GOOGL, check out "5 Stocks to Trade for Big Breakout Gains."
We're seeing the exact same setup in shares of IBM (IBM) , just slightly longer-term. Like Google, IBM is forming an ascending triangle setup, in this case with resistance at $195 to watch for the breakout. That's not because these two tech stocks tend to trade alike, mind you. In fact, Google and IBM have had an inverse relationship for much of the year.
But the trading implications for both stocks are just the same at this point: buy the breakout above resistance.
Why all of that significance at IBM's $195 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 IBM's stock.
The $195 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 $195 so significant. The move means that buyers are finally strong enough to absorb all of the excess supply above that price level. It makes sense to sit on the sidelines until the breakout is confirmed with a close materially above that $195 mark.
Johnson & Johnson
Health care giant Johnson & Johnson (JNJ) is the prototypical blue chip stock, so it's not surprising that it's one of the best-positioned names in the face of a flight-to-quality. But JNJ isn't just holding up in the face of selling right now -- it's one of the few names out there that's already in full breakout mode this week.
Johnson & Johnson has been moving higher all year long, but shares took a pause at the start of July, consolidating in a rounding bottom pattern. The rounding bottom pattern looks just like it sounds: It represents a gradual shift in control from sellers to buyers, a handoff that officially completed when JNJ broke out above $106 resistance at the end of last week, taking out the last glut of selling pressure in between shares and new all-time highs.
This week, it makes sense to buy the breakout.
Momentum adds some confidence to more upside in JNJ. Our momentum gauge, 14-day RSI, has been holding an uptrend since mid-July, and it hasn't lost steam even as the S&P got knocked lower. Since momentum is a leading indicator of price, new highs in RSI bode well for the JNJ trade this week.
GlaxoSmithKline (GSK) is another health care sector name that looks ready for a breakout this week. That's a change -- GSK has been a horrendous performer in 2014, dropping more than 11% since the calendar flipped to 2014. That's close to a 20% performance gap versus the S&P 500 over that same period. But GSK is finally looking "bottomy" here. Here's how to trade it.
GSK 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. The buy signal comes on a push through the resistance level that separates those two lows. For GlaxoSmithKline, that breakout level to watch is $49.
It's important not to try to anticipate the breakout in GSK. Shares have failed to catch a bid for the last several months, most recently gapping down hard after second quarter earnings hit. Once $49 gets definitively taken out, though, that gap could get filled quickly.
Brookfield Asset Management
Last up is Brookfield Asset Management (BAM) , the $30 billion alternative asset management firm. Brookfield has benefitted in a big way from the growing anxiety over stock prices this year, and assets under management have grown as a result. And at this point, you don't have to be an expert technical trader to see why BAM's chart looks buyable in September…
BAM has been a "buy the dips stock" all year long -- and shares are coming down for another dip this week. The high probability trade here is to buy the next bounce off of trendline support.
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 BAM can actually still catch a bid along that line before you put your money on shares. For risk management, it makes sense to keep a stop on the other side of the 50-day moving average.
Relative strength has been in an uptrend alongside BAM's share price since January, an indication that this stock is consistently outperforming the rest of the market right now. As long as that uptrend remains intact, BAM should continue to be a better bet than the S&P.
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.