BALTIMORE (Stockpickr) -- Tech stocks have been killing it in 2014 -- since the calendar flipped to January, the Technology SPDR ETF (XLK) is up 17.5%, versus a 12.1% gain from the big S&P 500 index. While the broad market's 2014 performance is nothing to sneer at, technology stocks have outperformed materially.
And it doesn't look like the tech stock rally is even close to being over at this point.
From a relative strength standpoint, the tech sector continues to be one of the leaders, and after slowing down over the last few months, the group is rounding the corner and beginning to lead again as momentum builds. Put simply, even if you've missed the bullish price action in tech this year, there's still time to buy. That's why, today, we're turning to the charts for a closer technical look at five stocks that look ready for breakout gains.
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.
NetApp (NTAP) got off to a slow start this year, but it's made up for lost time since May, rallying more than 27% over that stretch. Now, with a bullish technical setup in play, NTAP looks ready to kick off on another leg higher as we head into 2015. Here's how to trade it:
NetApp is currently forming an ascending triangle, a bullish price pattern that's formed by horizontal resistance above shares at $43 and uptrending support to the downside. Basically, as NetApp bounces in between those two technically important price levels, it's been getting squeezed closer to a breakout above our $43 price ceiling. When that happens, we've got our buy signal.
I mentioned earlier that relative strength has looked strong in the tech sector -- well, it's particularly good in NTAP. This stock's relative strength line has been in a solid uptrend going back to its May bottom, an indication that shares are still consistently outperforming the broad market. As long as that relative strength uptrend remains intact, NetApp should continue to be a leader.
Encore Wire Corp.
Electrical component maker Encore Wire Corp. (WIRE) is another name that looks ready for a big breakout in the near-term. That's welcome news for shareholders -- after all, WIRE has been a serial underperformer in 2014, shedding more than 31% of its market value since January. With a classic reversal setup showing up in shares of WIRE here, this stock is starting to look "bottomy".
WIRE is currently forming a double bottom pattern, a price setup that'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; for WIRE, the price to watch is $40.50. If shares can catch a bid above that $40.50 level, then we've got a buy signal in play.
Momentum is the side-indicator to watch in shares of WIRE here. 14-day RSI, our momentum gauge, made higher lows at the same time that Encore's price bottomed out around the same level. That's a bullish divergence that indicates buying pressure is building in WIRE right now. Wait for $40.50 to get taken out, then buy.
You don't have to be an expert technical trader to figure out why shares of online consumer identity security site LifeLock (LOCK) looks attractive here -- a quick glance at the chart should tell you everything you need to know about the price action here. LOCK has been a "buy the dips stock" going back to the middle of May, and as shares bounce off of a key level for the sixth time this year, we're getting a pretty obvious buy signal.
LifeLock has been bouncing its way higher in a well-defined uptrending channel for all of 2014. Put another way, every test of that lower trendline has provided traders with a low-risk buying opportunity this year. That's what makes last week's bounce at trendline support an ideal buying opportunity -- and now that the bounce has been confirmed, it's buyable.
Waiting for a 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 LOCK can actually still catch a bid along that line before you put your money on shares.
Communications device maker Harris Corp. (HRS) is in breakout mode this week, moving higher for another day following this stock's exit for a classic bullish reversal pattern. As shares make a run towards testing 2014's highs by year-end, it makes sense to take a position in HRS here.
Harris had been forming 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 on a breakout above the pattern’s “neckline” level, down at $72.
Harris is another name where momentum confirms the upside move in price. 14-day RSI had been making higher lows since the pattern started forming this summer, even while price was testing deep new lows during the pattern's head. If you decide to buy HRS here, I'd recommend parking a protective stop on the other side of the right shoulder at $68 -- if shares violate that level, then you don't want to own this trade any more.
United States Cellular
We're seeing the exact same setup in shares of United States Cellular (USM) -- the big difference is that USM's setup isn't quite as far along (the breakout in USM hasn't happened yet). Like Harris, U.S. Cellular is an inverse head and shoulders setup, in this case with a neckline at $39. A breakout above that $39 level is our buy signal.
Why all of that significance at that $39 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 USM's stock.
The $39 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 $39 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
That's good reason to keep a close eye on a $39 breakout in USM this week -- shares are within grabbing distance today.
-- 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