BALTIMORE (Stockpickr) -- Commodities have taken a nosedive in 2014. Over the past year, everything from oil to steel to corn to gold has been tumbling -- and so have the stocks that pull those commodities out of the ground. But the bleed for investors who own commodity-centric stocks could be coming to an end this fall.
It's not surprising that commodity producers have been feeling the hurt this year. As the spot prices of their wares drop, so too do their margins. In effect, that makes energy, mining and agriculture companies a sort of leveraged bet on the prices of the commodities they're exposed to. When commodity prices fall, they fall harder. (On the flip-side, commodity buyers such as airlines and food processing companies have been thriving on lower costs in recent quarters.)
But as we head closer to the end of the calendar year, more names are starting to show signs of strength. No, that doesn't mean that oil, ags and metals are headed straight up again for all of 2015, but it does mean that owning this oversold corner of the market in the intermediate term is starting to look like a very attractive trade.
Today, we're taking a technical look at five breakout buys in commodity-centric stocks, with a focus on the energy sector.
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 oil and gas supermajor Chevron (CVX - Get Report) , a name that's been no exception when it comes to the recent underperformance in the energy sector. Over the last three months, Chevron has shed almost 10% of its share price as oil and gas spot fell through the floor and extraction costs remained constant. But CVX is starting to look "bottomy" here.
Chevron is currently forming an ascending triangle bottom, a price setup that's formed by horizontal resistance above shares at $119 and uptrenidng support to the downside. Basically, as CVX bounces in between those two technically important price levels, shares are getting squeezed closer and closer to a breakout above our $119 price ceiling. When that breakout happens, we've got a high-probability buy signal.
Momentum, measured by 14-day RSI, adds some extra confidence to upside in Chevron. That's because our momentum gauge broke its downtrend, and has been making higher lows since CVX's stock price bottomed in October. That's an indication that buying pressure is starting to build again in shares. Since momentum is a leading indicator of price, that uptrend in RSI is good news for Chevron.
National Oilwell Varco
We're seeing the exact same price setup in shares of oilfield service provider National Oilwell Varco (NOV - Get Report) . Like Chevron, NOV is currently forming an ascending triangle bottom -- in this case with a breakout level at $74. A push through that $74 level is the signal that triggers our buy.
Why all of that significance at that $74 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 NOV's stock.
The $74 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 have been to buy. That's what makes a breakout above $74 so significant. The move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Our resistance level is getting tested this week -- but it's still crucial to wait for the breakout before you buy it.
Halliburton (HAL - Get Report) is another oilfield service stock that's showing signs of a bottom after a big selloff this year. In the last six months, Halliburton has unloaded more than 22% from its share price, but shares are starting to look oversold now. The pattern to watch in HAL is a double bottom.
The double bottom in Halliburton looks just like it sounds: it's formed by a pair of swing lows that bottom out at approximately the same price level. The buy signal comes on a push above the peak that separates those two lows. That resistance level to watch is up at $56. That means if shares can break out above $56, then buyers are in control of shares of HAL once again.
The fact that Halliburton has been one of the hardest-hit large-cap names in the energy sector comes with some equally large upside implications if this stock can manage to catch a bid and break out above resistance. That said, risk management is crucial here. When $56 gets taken out, I'd recommend placing a protective stop right at $48.
The good news is that you don't need to be an expert technical trader to figure out what's going on in shares of UK-based oil giant BP (BP - Get Report) . BP has taken 2014's trading environment doubly hard, batted lower by a strong dollar that's pushed oil prices down while simultaneously punishing firms that earn a large chunk of their revenues in non-dollar denominated countries. But after bouncing its way lower in a textbook downtrend since the summer, BP has finally broken that bearish pattern.
The price channel in BP had been the defining factor in shares' decline during the second half of 2014. So the fact that this stock finally pushed above the top of the channel means that buyers are back in control -- at least for now. Higher levels look likely in the intermediate-term, but it's important to keep a tight stop in place here. If shares violate support at $40, then it's time to get out.
BP is another name where going oversold in early October could translate in to some quick material upside action as we end December. More risk-averse buyers should wait for shares to cross the 50-day moving average before scaling into a position.
Stepping outside of the energy sector brings us to Alcoa (AA - Get Report) , the 20 billion aluminum stock. Alcoa is one basic materials sector name that's actually seen pretty stellar price action in 2014; shares are up 62% year-to-date. But don't worry if you've missed the move so far -- AA looks likely to show traders a second act as we head into December.
Alcoa just broke out of an inverse head and shoulders pattern, a bullish reversal 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 came at the end of last week on the breakout above the pattern's "neckline" level at $17.25.
Relative strength is the side-indicator that adds confidence to the AA trade. This stock's relative strength line has held its uptrend all year long, which means (not surprisingly) that Alcoa is outperforming the rest of the market in good times and bad ones. As long as that relative strength uptrend remains intact, shares of Alcoa should keep outperforming.
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.
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