BALTIMORE (Stockpickr) -- There's no doubt about it: The U.S. has been the place to be in 2014. Since the calendar flipped to January, the big American stock indices are up mid-single digits, while, with few exceptions, overseas stocks are down.
The UK's FTSE 100? Down 5.5% year-to-date. Japan's Nikkei 225 is down nearly the same. In Germany, the DAX is down a whopping 11.2% over that same stretch. And Brazil's Ibovespa has shed almost 7% since the middle of last month on election concerns.
It's no understatement to say that owning most foreign stocks has been a mistake this year. But with growing concerns that the S&P is starting to get top-heavy, it's not such a bad idea to look elsewhere for performance in the fourth quarter. Obviously, the indices are off limits -- they've been lagging U.S. markets all year. Instead, the trick is to find the names that are best-positioned to outperform.
To do that, we're turning to the technicals 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.
Up first is Dublin-based budget airline Ryanair Holdings (RYAAY) . Ryanair has seen strong performance in 2014, rallying 18% since the start of the year, and broadly outperforming other names in the Eurozone. But don't worry if you missed the move, because RYAAY looks ready to set off on another leg higher here.
Ryanair is currently forming a long-term ascending triangle pattern, a bullish setup that's formed by horizontal resistance above shares at $58 and uptrending support to the downside. Basically, as shares of Ryanair bounce in between those two technically-significant price levels, they're getting squeezed closer to a breakout above resistance at our $58 price ceiling. When that happens, we've got our buy signal.
The $58 price ceiling in Ryanair is more of a range than a discrete level. That's because shares previously tested a breakout above that level earlier this year, only to get swatted lower at $60. For that reason, it makes sense to scale into the Ryanair trade; traders willing to take on a little more risk can pull the trigger at $58, while more risk averse investors should wait for $60 to get taken out before clicking "buy."
Chinese search giant Baidu (BIDU) is another foreign name that's coming into the fourth quarter with better performance than most. Despite ongoing concerns over weakness in the Chinese economy, Baidu has been trading more like a U.S. tech name in 2014, and that has helped to drive a rally in shares.
More recently, Baidu has been tracking sideways. Here's how to trade it.
The sideways action in Baidu is forming a rectangle pattern, a consolidation setup formed by a pair of horizontal resistance and support levels that basically "box in" shares between $210 and $230. Consolidations like the one in BIDU are common after big moves (like the one that started in April); they give the stock a chance to bleed off momentum as buyers and sellers figure out their next move. From here, a breakout above $230 is the next buy signal on the way up, while a violation of support at $210 means more downside suddenly looks likely.
Relative strength is the side indicator that's adding confidence to upside in Baidu here: the relative strength line has been in an uptrend since May, indicating that this name is outperforming the S&P 500 in good times and bad ones. As long as that uptrend remains intact, Baidu should keep doing better than the broad market.
As of the most recently reported quarter, Baidu was one of SAC Capital's top holdings and also showed up in Steve Mandel's Lone Pine Capital Portfolio. I featured it last month in "Hedge Funds Love These 5 Tech Stocks -- but Should You?."
Canadian paper company Domtar (UFS) , on the other hand, hasn't had a particularly good year in 2014. In fact, shares are down more than 23% in the past nine months, making this name a major performance sink. But shareholders could be in for a dramatic reprieve. Domar is starting to look "bottomy" this week.
Right now, UFS is forming a double bottom pattern, a bullish reversal pattern that's formed by two swing lows that bottom out around the same price level. The buy signal comes on a breakout above the intermediate peak that separates those two lows, which comes on a move through $38 in Domtar.
Why all of that significance at that $38 level? It all comes down to buyers and sellers. Price patterns like the ascending triangle or double bottom 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 UFS' stock.
The $38 resistance level was a price at which there has been an excess of supply of shares; in other words, it's a spot at which sellers have previously been more eager to step in and take gains than buyers had been to buy. That's what makes a breakout above $38 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Wait for $38 to get taken out before jumping in.
Finnish handset maker Nokia (NOK) has been on a tear since the start of the summer. Since May, Nokia has rallied 17%, outperforming the S&P 500 by triple. Even better, you don't need to be an expert technical trader to figure out why. Nokia has been a "buy-the-dips stock" for the last five months, and we're seeing another big dip this week.
Nokia has been bouncing its way higher in a well-defined uptrending channel, a setup formed by a pair of parallel trend lines in shares. Those trend lines identify the high-probability range for shares to trade within, and buying at the lower line has worked incredibly well over the course of this setup. So with shares bouncing again this week, it makes sense to get in here.
Last week's bounce off of support was a critical test for two big reasons: It was the spot where shares have the furthest to move up before they hit resistance, and it was 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 NOK can actually still catch a bid along that line before you put your money on shares.
I'd recommend parking a protective stop on the other side of the 50-day moving average if you decide to buy here.
Last up is Chinese railroad name Guangshen Railway (GSH) . GSH has been a more typical Chinese equity name performance-wise in 2014, with shares selling off 15% as uncertainty in China hit transports. But GSH is showing signs of a reversal thanks to a classic technical setup in shares. This is a long-term setup, so patience is a virtue in this stock, but it should come with equally long-term upside implications when and if the breakout happens.
GSH is currently 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 (that's the $23 price level in GSH).
The minimum measuring objective in GSH puts a price target up at $28. If our $23 neckline level gets taken out, then look for $28 to step in as the next potential stumbling block. Don't get thrown off by the abundance of gaps on this stock's chart right now. Those gaps, called suspension gaps, are caused by overnight trading in Hong Kong and Shanghai. They can be ignored for trading purposes.
To see this week's trades in action, check out the Must-See Charts portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.