BALTIMORE (Stockpickr) -- We've had a pretty innocuous week so far in the markets, the big indices adding a few dozen basis points between Monday's open and Wednesday's close. All the while, stocks sit within striking distance of fresh all-time highs.
Now seems like a good time to point out the fact that the S&P 500 has been a pretty poor proxy for "the stock market" in 2014 (and so have the other big stock indices, for that matter). Sure, it's been a strong year for the S&P: the index is up 10.8% since January. But more than a third of the S&P's performance this year has come from just ten stocks. Put simply, many of the biggest stocks on the market are showing very different price action this fall.
And that's providing us with a handful of trading opportunities in some of Wall Street's biggest names.
So today, we'll take a technical look at five large-cap stocks to trade for gains…
First, a little on the technical toolbox we're using here: 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.
International Business Machines
Up first is International Business Machines (IBM) , a perfect example of a mega-cap stock that hasn't traded anything like the broad market in 2014. Since the calendar flipped to January, IBM has sold off to the tune of 14%, underperforming the S&P by a huge margin. But long-suffering shareholders could be in store for a reprieve here -- IBM is showing signs of a bottom this fall.
That's because IBM is currently forming an ascending triangle bottom, a bullish price setup that's formed by horizontal resistance above shares (in this case at $165) and uptrending support to the downside. Basically, as IBM bounces in between those two technically important price levels, it's getting squeezed closer to a breakout above that $165 price ceiling. When that happens, buyers are in control of shares again.
Momentum, measured by 14-day RSI, adds some bullish context to the IBM trade. Our momentum gauge has been making higher lows since it got grossly oversold in October, an indication that buying pressure is starting to build. Remember, the buy signal doesn't come until $165 gets taken out.
Las Vegas Sands
Casino operator Las Vegas Sands (LVS) is another large-cap name that's starting to look "bottomy" after selling off all year long. Sands has shed more than 20% of its market value since January, grinding investors who've been trying to pick a bottom in this stock all year long. But the key is that you don't want to predict where the bottom is -- instead, the high-probability trade comes in reacting after the bottom gets made.
LVS is forming a rounding bottom pattern, a price setup that looks just like it sounds. The rounding bottom indicates a gradual transition in control of shares from sellers to buyers -- and the buy signal comes on a breakout above resistance at $64. Don't put money on LVS until shares can catch a bid above that $64 level again…
Why all of that significance at that $64 level? It all comes down to buyers and sellers. Price patterns like the ascending triangle or rounding 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 Sands' stock.
The $64 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 $64 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
$9 billion packaging company Ball Corp. (BLL) has actually been a spectacular performer in 2014 -- shares are up 25% since the beginning of the year. But don't worry if you missed the move so far; Ball is headed for more upside before the end of the year. And it's all thanks to one of the most basic price patterns in our playbook…
Ball has been bouncing its way higher in a well-defined uptrending channel, in this case since the start of May. Every test of trendline support has provided investors with a low-risk buying opportunity for shares of Ball, and shares are bouncing off of support for an eighth time this week. It makes sense to buy this support bounce.
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 BLL can actually still catch a bid along that line before you put your money on shares.
All eyes have been on Micron Technology (MU) in recent months -- after all, this stock has been one of the biggest momentum names of the last couple years, rallying nonstop since the start of last year. After consolidating sideways since July, Micron's chart is starting to give traders some clues for what's in store ahead. And we're coming up on a good time to be a buyer in MU again…
That's because Micron is in the early stages of forming an inverse head and shoulders setup, a bullish reversal pattern 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 $34 price level in MU).
Even though the right shoulder hasn't formed yet, any close above $34 from here is a buy signal in Micron. That's because $34 has been the level that's swatted shares lower since the start of July -- if MU can suddenly catch a bid above $34, we've got our signal that buyers have taken control of this stock. Don't be early on this trade; Micron has been a volatile name this year, and that means that a failure at $34 could come with quick downside.
We're seeing almost the same setup in shares of another tech stock, Applied Materials (AMAT) . That's not hugely surprising -- after all, stocks in the same industry often sport high correlations with one another. But it means that traders have a second way to play the price action in MU right now.
For AMAT, the neckline level to watch is up at $23. Even though neither of these inverse head and shoulders setups is particularly "textbook", that doesn't matter much. The trading implications are just as bullish on a move above AMAT and MU's respective necklines. In the case of Applied, a push above $23 clears the way up to a price target of $27.
Lest you think that the inverse head and shoulders is too well known to be worth trading, the research suggests otherwise: a recent academic study conducted by the Federal Reserve Board of New York found that the results of 10,000 computer-simulated head-and-shoulders trades resulted in “profits [that] would have been both statistically and economically significant.” That’s good reason to keep a very close eye on Micron and Applied this week…
To see this week's trades in action, check out the Must-See Charts portfolio on Stockpickr.
-- 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 that 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