Must-See Charts: How to Trade IBM, Santander and More

 

BALTIMORE (Stockpickr) -- U.S. markets corrected hard yesterday, the S&P 500 shedding 1.64% between the opening and closing bells. That marks the worst session for stocks in nearly two months, and enough to shove the big index back into single-digit gains for 2014.

More important, it's enough to make stock investors nervous as the year flips to a close.

The good news is that this week's correction doesn't look like a sign of what's to come in 2015. The S&P has traded in a very well-defined range all year long, and with the bit index pressing against the top of its price channel, a correction was overdue heading into December. There's no question that this is still very much a "buy-the-dips market."

To take full advantage of that bullish bent to stocks over the longer-term, we're taking a closer technical look at five big 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.

CenturyLink


First up is CenturyLink (CTL) , the $22 billion telecom stock. 2014 has been a great year for CenturyLink shareholders. Since January, this stock has rallied more than 20% thanks to a fat dividend payout and consistent profitability quarter-to-quarter. But don't worry if you've missed the upside so far this year. Shares look likely to keep up their rally thanks to a bullish technical setup in shares.

CenturyLink is currently forming an ascending triangle pattern, a bullish price setup that's formed by horizontal resistance above shares at $41 and uptrending support to the downside. Basically, as CTL bounces in between those two technically-meaningful price levels, it's been getting squeezed closer and closer to a breakout above our $41 price ceiling. When that happens, we've got our buy signal.

After the breakout, CTL's most recent swing low at $38 looks like a good place to park a stop loss order. Don't be early on this trade. CTL isn't a high-probability buy until shares can catch a bid above our $41 line in the sand.

International Business Machines


On the other hand, International Business Machines (IBM) hasn't had a very attractive year. In fact, shares of the tech behemoth are down more than 14.4% since January – that's more than 25% underperformance versus the broad market. But while IBM is down, it's not out just yet. A textbook consolidation pattern in shares is setting things up for a possible breakout in December.

IBM has been consolidating sideways for the last couple of months, bouncing around in a rectangle pattern. The rectangle setup is formed by a pair of horizontal resistance and support levels that basically "box in" shares between $160 and $165. Consolidations like the one in IBM are common after big moves (like the huge drop that started in September); they give the stock a chance to bleed off momentum as buyers and sellers figure out their next move.

From here, a breakout above $165 is the next buy signal on the way up. A violation of support at $160 means more downside suddenly looks likely. Don't try to predict which way Big Blue is going to resolve. Instead, just react when it does by trading in that direction.

Discover Financial Services


I mentioned earlier that the S&P 500 has been a classic buy-the-dips market all year long. Well, likewise, Discover Financial Services (DFS) has been a classic buy-the-dips stock. The good news is that don't need to be an expert technical trader to figure out what's going on in shares of this $30 billion payment network. A quick glance at the chart should tell you pretty much everything you need to know.

Discover has been bouncing its way higher in a well-defined uptrending channel for the better part of the last year now. That channel is formed by a pair of parallel trend line support and resistance levels that identify the high-probability range for shares to stay within. Put more simply, every touch of trend line support in 2014 has been an extremely low-risk opportunity to get into shares of DFS, and we're touching that level for a seventh time this week. From here, buy the 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 DFS can actually still catch a bid along that line before you put your money on shares.

Banco Santander


$109 billion Spanish bank Banco Santander (SAN) has been harangued by macro factors all year long. As one of the best direct plays on the Eurozone's financial sector tradable here in the U.S., it's been a go-to name for macro traders. And as a result, shares have been pointed at the ground for the last six months. Over that stretch, shares are down around 20%.

But long-suffering shareholders could be in for a reprieve in SAN this month. Shares are showing traders a classic bullish reversal setup.

Santander is forming an inverse head and shoulders setup, 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 $9 price level in SAN).

The side indicator in the SAN trade is momentum, measured by 14-day RSI. Our momentum gauge has been making higher lows, even as Santander's stock hit lower levels when it made its head last month. Since momentum is a leading indicator of price, look for price to follow. The breakout above $9 is a clear-cut buy signal.

Adobe Systems


We're seeing the exact same setup taking shape in software company Adobe Systems (ADBE) . Like Santander, Adobe is currently forming an inverse head and shoulders setup. Unlike the European bank, Adobe's pattern isn't coming at the end of a downtrend. Instead, it's pressing up against new highs. Even though that may not be a "textbook" chart pattern, the trading implications are exactly the same here. $74 is the breakout level to watch for in shares of ADBE.

Why all of that significance at that $74 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 ADBE's stock.

The $74 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 $74 so significant. The move means that buyers are finally strong enough to absorb all of the excess supply above that price level.

-- Written by Jonas Elmerraji in Baltimore.

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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

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.

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