BALTIMORE (Stockpickr) -- The big stock indices rung the bell at new closing highs yesterday, and they're pointing towards more of the same today. U.S. markets have basically been in straight up mode for the last three weeks now, rallying a whopping 9.4% since the middle of October.
And stocks are pointed slightly higher this morning…
Not that there's anything wrong with that. Many folks don't realize that new highs are Mr. Market's "normal mode" -- since 1982, almost half of all S&P 500 trading sessions have closed within 5% of all-time highs. That number even factors in huge market declines like 2008. Put simply, this market momentum isn't likely to want anytime soon.
But the market can be beaten. To do that, we're taking a technical look at five breakout trades to grab for gains 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.
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Up first is AGL Resources (GAS) , a $6.5 billion natural gas utility. Utility stocks have been quietly working their way higher in recent months, showing better relative strength than any other sector in November And AGL Resources is no exception: it's up 15% since the calendar flipped to January.
But don't worry if you missed the move year-to-date -- shares are flirting with an important breakout level this week.
GAS has spent the last few months forming an ascending triangle pattern, a bullish price setup that's formed by horizontal resistance above shares at $55 and uptrending support to the downside. Basically, as GAS bounces in between those two technical levels, it's been getting squeezed closer to a breakout above that $55 price ceiling. When that happens, we've got our buy signal -- and we're very close at the start of today's session.
How about that relative strength I mentioned a moment ago? It looks stellar in GAS -- in fact, this stock's relative strength line has held its uptrend since the start of the year, an indication that GAS is outperforming the rest of the market in good times and bad ones. As long as that relative strength uptrend remains intact, shares of GAS should keep outperforming.
Cobalt International Energy
Cobalt International Energy (CIE) , on the other hand, hasn't had such a good run in 2014. Shares of this oil exploration company are down 38% since the start of the year, sold off along with the rest of the energy sector as commodity prices have cratered. But long-suffering shareholders could be in store for a reprieve in CIE this fall. Here's how to trade it:
CIE is forming a double bottom pattern, a bullish reversal setup that looks just like it sounds. The buy signal comes on a push through the peak that separates the two bottoms in CIE, up at the $12 level. In other words, if CIE can close above $12, then buying it becomes a high-probability trade again.
Momentum, measured by 14-day RSI, adds some extra confidence to upside in CIE. That's because our momentum gauge has been making higher lows even while price bottomed out at the same level, an indication that buying pressure continues to build in shares. Since momentum is a leading indicator of price, that uptrend is good news for Cobalt. Even so, don't buy shares until they can catch a bid above $12.
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Discover Financial Services
You don't have to be an expert technical trader to figure out what's going on in shares of Discover Financial Services (DFS) -- the setup in this $30 billion payment services stock is about as simple as they get. And it's pointing higher this fall.
Discover is breaking out to new highs this week, but the real story comes from zooming out to the uptrend that's been in play all year long. The uptrending channel in Discover is formed by a pair of parallel trendline support and resistance levels that identify the high-probability range for shares to stay within. Put simply, every touch of trendline support has been a low-risk opportunity to get into shares. With shares in the upper third of the channel, it makes sense to wait for a pullback before piling into DFS, but, if history is any indication, investors' patience will be rewarded.
DFS' most recent swing low at $61 is a logical place to park a protective stop on this uptrend. If shares violate that low, then the uptrend in Discover is broken, and you don't want to own shares anymore.
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We're seeing the exact same setup in shares of WhiteWave Foods (WWAV) . Just like with Discover, WWAV has been bouncing its way higher in a textbook uptrending channel all year long. So now, it makes sense to wait to buy the next bounce off of trendline support.
Waiting for a bounce off of support is a critical test for two big 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 WWAV can actually still catch a bid along that line before you put your money on shares.
$33 is a logical place to park a protective stop on the WWAV trade. A violation of $33 means that the uptrend is over…
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Macquarie Infrastructure Company
Last up is Macquarie Infrastructure Company (MIC) , a name that's looking to tack onto its 2014 gains with a breakout this week. MIC is forming a very non-textbook inverse head and shoulders pattern, a price setup that indicates exhaustion among sellers. Even though this isn't a textbook pattern, the trading implications are exactly the same here -- the buy signal comes on a breakout above this stock's neckline at $72.
Why all of that significance at that $72 level? It all comes down to buyers and sellers. Price patterns like the inverse head and shoulders 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 MIC's stock.
The $72 resistance level was 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 had been to buy. That's what makes a breakout above $72 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Wait for $72 to get taken out before jumping in.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in the names 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