BALTIMORE (Stockpickr) – Where's the love for the mid-cap stocks in 2015?
Typically, investors get fixated on the biggest and smallest stocks on the market. But that’s a big mistake. By ignoring the mid-caps, investors are leaving money on the table this year.
Mid-cap stocks -- loosely defined as those issues with market capitalizations between $2 billion and $10 billion -- may make up only 24% of the big S&P 500 index, but widen your net and they far outnumber blue chips. That means there are more potential opportunities in the individual mid-cap names. More important, they're outperforming the broad market averages in 2015.
In case you're unfamiliar with technical analysis, here's the executive summary: 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, here's a rundown of five technical setups that are showing solid upside potential right now.
Tempur Sealy International
Up first on the list is mattress maker Tempur Sealy International (TPX - Get Report) . Tempur Sealy has provided investors with a pretty cushiony ride so far in 2015. Since the calendar flipped to January, this bedding stock has rallied more than 41%, leaving the rest of the market in its dust. But don't worry if you've missed the move in Tempur Sealy; shares look likely to kick off a second leg higher this fall.
Tempur Sealy is currently forming an ascending triangle pattern, a bullish price setup that's formed by horizontal resistance up above shares at $79 and uptrending support to the downside. Basically, as Tempur Sealy bounces in between those two technically-significant price levels, it's been getting squeezed closer and closer to a breakout above our $79 price ceiling. When Tempur Sealy's share price moves above $79, we've got a fresh buy signal.
Relative strength, (not to be confused with RSI at the top of the chart) adds some extra confidence to the upside in Tempur Sealy right now. That's because this stock's relative strength line is holding its uptrend from the start of the year, indicating that shares are continuing to beat the rest of the market long-term even now. As long as that uptrend in our side-indicator stays intact, Tempur Sealy is primed to keep on outperforming the rest of the market. Wait for $79 to get breached before you buy.
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We're seeing the exact same setup in shares of Herbalife (HLF - Get Report) right now. This $5 billion stock has been a volatile name in the last couple of years, but that volatility has been a lot more one-sided since the calendar flipped to 2015. Year-to-date, Herbalife has managed to rally more than 45%. From here, the big breakout level to watch is resistance up at $60.
Why all of that significance at that $60 level? It all comes down to buyers and sellers. Price patterns, such as this ascending triangle pattern in Herbalife, 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 Herbalife's shares.
The $60 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 $60 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
Don't try to jump ahead of the breakout in Herbalife. Buying shares doesn't become a high-probability trade until $60 gets taken out.
Bullish mid-cap setups aren't relegated to stocks based here at home; $3 billion Chilean banking company CorpBanca (BCA) is showing traders the first signs of a reversal this fall. After spending the last several months selling off, CorpBanca looks like it's finally ready to catch a bid again. And shares could be about to make up for lost time in the final stretch of 2015.
CorpBanca is currently forming a double bottom pattern, a bullish reversal pattern that looks just like it sounds. The double bottom is formed by a pair of price lows that bottom out at approximately the same level; the buy signal comes with a move through the peak that separates those two troughs. For CorpBanca, that buy trigger comes on a move above $14.50, a resistance level that's held technical significance going all the way back to January.
Momentum, measured by 14-day RSI, provides some extra evidence for the reversal in CorpBanca. 14-day RSI, our momentum gauge, has been in an uptrend since mid-August, making higher lows during each of CorpBanca's two price lows. That's a bullish divergence that indicates that buyers are quietly stepping back into this stock. When $14.50 breaks to the topside, it's time to join the buyers in this Chilean bank.
Good news: You don't need to be an expert technical trader to figure out what's been going on in shares of $7.9 billion travel technology firm Sabre (SABR - Get Report) . Instead, the price action in this mid-cap tech stock has about as simple as it gets. In short, Sabre has been a "buy the dips stock" for all of 2015, and as shares come off their sixth dip this year, we're looking at another big buying opportunity in October.
Sabre's price pattern is an uptrending channel, a basic setup that's formed by a pair of parallel trend lines. Those trend line support and resistance levels have identified the high-probability range for shares of Sabre to remain stuck within all year long, and every test of the bottom of that channel has presented bulls with a low-risk, high-reward buying opportunity. Shares tested support for a sixth time at the beginning of this month, and they've been bouncing higher in the sessions since. From here, it makes sense to buy the bounce.
Actually waiting for that bounce is important for two key reasons: It's the spot where shares have the most room 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 the channel breaks, and you know you're wrong).
Remember, all trend lines do eventually break, but by actually waiting for this bounce to happen first, you're ensuring Sabre can actually still catch a bid along that line before you put your money on shares.
InterContinental Hotels Group
Last up on our list of bullish mid-cap trades is $8.8 billion hotelier InterContinental Hotels Group (IHG) . InterContinental has found its shares under pressure for a big chunk of the year, selling off more than 15% from its highs back in May. But a classic reversal pattern in InterContinental's price chart points to a reprieve for long-suffering shareholders this fall.
InterContinental is currently forming an inverse head and shoulders pattern, a bullish price setup that signals 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." That's the $38 level in InterContinental.
Even though the right shoulder isn't fully formed yet here, that doesn't change the trading implications on this stock. If $38 gets taken out, then it's time to buy.
Don't get thrown off by the abundance of gaps on InterContinental's chart right now. Those gaps, called suspension gaps, are caused by overnight trading in shares of IHG on the London Stock Exchange, where shares are dual-listed. Those gaps can be ignored for trading purposes.