BALTIMORE (Stockpickr) -- The broad market isn't off to a very good start this week. As of Wednesday's close, the big S&P 500 index has already given back about half of its 2015 gains since Monday's open. Sure, those gains weren't much to speak of to begin with, but in a market where every basis point counts, a 1.3% correction is pretty painful.
The good news is that, despite a lackluster market, some corners of the market are actually performing well. In fact, some of Wall Street's biggest stocks actually look ready to break out right now.
To sniff them out, we're turning to the charts for a 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.
Up first on the list is McKesson (MCK). Like other healthcare sector names, McKesson has been a solid performer in 2015, rallying 7.4% since the calendar flipped to January. Make no mistake: In this market, a 7.4% gain counts as a "rally." But don't worry if you've missed the move so far. MCK looks ready to kick off a second leg higher in May.
McKesson is currently forming an ascending triangle pattern, a bullish price setup that's formed by horizontal resistance above shares (in this case at $231) and uptrending resistance to the downside. Basically, as this health stock bounces in between those two technically important price levels, it's been getting squeezed closer and closer to a breakout above $231 resistance when that happens, we've got a buy signal.
For McKesson, relative strength is the side-indicator to watch right now. Our relative strength line has been in an uptrend going all the way back to last summer, an indication that MCK isn't just moving higher, it's also outperforming the rest of the market right now. As long as that uptrend in relative strength remains intact, MCK should keep on beating the S&P.
Industrial machinery stock Dover (DOV) may not have much in common with McKesson, but it's showing traders the exact same price setup right now. Just like MCK, Dover is forming an ascending triangle pattern, in this case with a breakout level down at $74. While the ascending triangle in Dover is showing up after a downtrend, not after a rally, that doesn't change the trading implications of this stock now.
What does change things is the fact that DOV already broke out above our $74 price ceiling last week. Don't worry, a throwback is giving traders a second chance at a low-risk entry here.
A throwback happens when a stock breaks out, and then moves back down to test newfound support at that former price ceiling level -- in this case, our $74 price level. And while throwbacks look ominous, they’re actually constructive for stock prices because they re-verify the stock’s ability to catch a bid at support. For that reason, it’s best to think of a throwback as a buying opportunity in DOV, not a red flag. From a risk/reward standpoint, the optimal time to buy comes on the next bounce off of $74.
From there, look at previous resistance at $84 as DOV's next potential stumbling block on the way up.
Speaking of reversals, Sasol (SSL) could really use one.
This South African energy and chemical company has been getting pummeled in the last 12 months, shedding almost 29% of its market value in that timeframe. But long-suffering shareholders could be in store for a reprieve from this $29 billion stock. That's because SSL is forming a double bottom pattern right now.
SSL's double bottom is a bullish reversal pattern that looks just like it sounds. The setup is formed by a pair of swing lows that find support at approximately the same price level. The buy signal comes on a breakout through the peak that separates though two troughs. For SSL, that's the $42 resistance level.
Momentum, measured by 14-day RSI, adds some extra upside confidence to the setup in Sasol. Our momentum gauge has been in an uptrend since January, making higher lows during SSL's pair of price lows. That's a bullish divergence that indicates that buying pressure has been building under the surface. When $42 gets taken out, SSL becomes a buy.
The good news is that you don't need to be an expert technical trader to figure out what's been going on with shares of telco giant Verizon (VZ) right now. Instead, the price action in this $204 billion communications stock is about as straightforward as it gets. Here's how to trade it.
Verizon has been bouncing its way higher in an uptrend channel since the middle of December, moving up on every test of trend line support. In other words, every touch of that lower trend line has provided a relatively low-risk, high-reward buying opportunity for investors trying to build a position. And shares are coming down for a sixth time this week. Wait for a bounce off of that blue support line before you buy.
Waiting for that 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 VZ can actually still catch a bid along that line before you put your money on shares.
Last up on the list is Hewlett-Packard (HPQ), the $60 billion technology stock that's been dragged more than 19% lower since January started. While H-P has gotten shellacked in the last few months, it's finally starting to look bullish again. That's because this stock is forming an inverse head and shoulders pattern, a reversal setup that indicates a 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 level in HPQ. We're still forming the right shoulder on H-P's chart at this point, but that's just semantics. The bottom line is if HPQ can crack $34, then we've got a buy signal.
Why all of that significance at that $34 level? It all comes down to buyers and sellers. Price patterns, like this inverse head and shoulders setup in HPQ, 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 H-P's stock.
The $34 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 $34 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. It hasn't happened yet, though.
For the best risk/reward tradeoff, wait for shares to catch a bid above $34 before you buy HPQ.