BALTIMORE (Stockpickr) -- After falling 1.52% on Tuesday, yesterday's 1.75% pop in the S&P 500 means just one thing for investors this fall: Volatility is back, baby.
Even though the VIX Volatility Index currently sits well below the highs it hit back in the summer, there's no question that volatility is on the rise. Average True Range, a statistical measure of volatility, is at the highest levels we've seen in nearly three years now. But volatility doesn't have to be a bad thing, and the fact that the VIX is on the decline at the same time statistical volatility spikes means that buyers are in control of the flux in this market right now.
To take full advantage of the larger moves, we're taking a technical look at five big stocks to trade for gains.
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 big stocks to trade this week.
The price action has been interesting in Wells Fargo (WFC - Get Report) in the last few months. After rallying nearly 15% since the start of the year, shares of this big bank have spent most of the stretch since June consolidating sideways. And while that initially looked "toppy," Wells Fargo's setup has evolved into something considerably more bullish in recent sessions. Here's how to trade it.
Wells is currently forming an ascending triangle pattern, a bullish technical setup that's formed by horizontal resistance above shares at $53 and uptrending support to the downside. Basically, as Wells Fargo bounces between those two technically important levels, it's getting squeezed closer to a breakout above that $53 price ceiling. When that breakout happens, we've got our buy signal.
Relative strength is the side indicator that's adding confidence to upside in Wells Fargo here. The relative strength line has been in an uptrend all year long, indicating that WFC is outperforming the S&P 500. As long as that new uptrend remains intact, Wells should keep doing better than the broad market.
The bull trap in early September is good reason to be a little skeptical on an early move above $53. Wait for confirmation before putting cash on the line.
We're seeing the exact same setup right now in shares of $73 billion regional banking stock U.S. Bancorp (USB - Get Report) , the big difference is that this stock's ascending triangle setup is shaping up in the much longer-term. The breakout level to watch in USB is $43.25. When that level gets taken out, it's a buy.
Why all of that significance at that $43.25 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 USB's stock.
The $43.25 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 $43.25 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 above that $43.25 mark.
This week looks like a good time to buy Apple (AAPL - Get Report) -- and the good news is that you don't need to be an expert technical analyst to figure out why. Instead, the setup in this tech behemoth is about as simple as they get. Apple has been bouncing its way higher in a well-defined uptrending channel since the start of the summer, making it a "buy-the-dips stock."
Buying the dips isn't some kind of stock market platitude here – it's very well defined. Apple's uptrend is bounded by a pair of parallel trend lines that have corralled this stock's price action for the last three months now. Since the end of June, every test of trend line support has provided traders with a high-probability opportunity to be a buyer. And so, with shares touching that support line for the sixth time now, it makes sense to buy the next bounce higher.
The 50-day moving average has been a good proxy for trend line support over the last couple of months, but traders who try to park a protective stop there are likely to get whipsawed. Instead the most recent swing low at $97.50 is a better place to cap short-term risk.
At first glance, there isn't a lot of business overlap between Apple and Swiss drug maker Novartis (NVS - Get Report) -- but take a look at the charts, and they have a lot more in common. Like Apple, Novartis has been bouncing its way higher in a well-defined uptrend (albeit in the longer-term). Now, as NVS closes in on trend line support for the fourth time in the last year, we're closing in on a textbook opportunity to buy the next bounce.
Waiting for the next 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 NVS can actually still catch a bid along that line before you put your money on shares.
Since this is a longer-term setup, the 200-day moving average has started acting as a good support level to use for risk management purposes. If the 200-day gets violated, the uptrend is broken and you don't want to own NVS anymore.
Last up is Chinese national energy company PetroChina (PTR - Get Report) . PetroChina has been one of the best-performing energy names in 2014, rallying close to 18% since the calendar flipped to January, but the rally in PTR is starting to show some cracks. In fact, this energy giant is looking "toppy" here.
PTR is currently forming a head and shoulders top, a setup that indicates exhaustion among buyers. The setup is formed by two swing highs that top out at approximately the same level (the shoulders), separated by a higher high (the head). The sell signal comes on a move through PetroChina's neckline at $125, a level that's been important from a technical standpoint going back to July.
The side indicator in the PTR trade is momentum, measured by 14-day RSI. Our momentum gauge has been making lower highs, even as PTR's price made higher levels over the course of the head and shoulders pattern. That's a bearish divergence that points to more downside this fall.
If shares violate $125, PTR becomes a high-probability sell.
To see this week's trades in action, check out the Must-See Charts portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.