Without a doubt, some big pockets of the market are working again this autumn.
October has brought an about-face for the markets. Since the calendar flipped to the new month, the big S&P 500 index has managed to rally 5.79%, putting it back within grabbing distance of breakeven before year-end.
More important, that rally has seen participation from the majority of individual issues. Since the beginning of the month, 90% of the individual stocks in the S&P are up. That's some attractive breadth.
As impressive as the big picture looks right now, zooming in to stocks on an individual basis reveals some major strength beneath the surface. So far, a full 20% of individual S&P 500 components are up 10% or better since October, indicating that a big chunk of individual stocks are doing considerably better than the market averages suggest.
To find the stocks that look best-positioned to outperform this fall, we're turning to the charts for a technical look.
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.
Pampa Energia SA
2015 has been a big year for U.S. investors in Argentinian electric company Pampa Energia SA (PAM - Get Report) . Since the start of 2015, this $1.4 billion utility has rallied more than 77%, leaving the rest of the market in its dust. But don't worry if you've missed the move in this Latin American electric play. Shares look likely to kick off a second leg higher in the final stretch of the year.
Pampa Energia is currently forming an ascending triangle pattern, a bullish price setup that's formed by horizontal resistance up above shares at $17.50 and uptrending support to the downside. Basically, as Pampa Energia bounces between those two technically significant price levels, it's been getting squeezed closer and closer to a breakout above our $17.50 price ceiling. Shares are testing that level this morning; a confirmed breakout means it's time to buy Pampa Energia.
Relative strength (not to be confused with RSI at the top of the chart) adds some extra confidence to the upside in Pampa Energia 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. Keep a close eye on this one -- as long as that uptrend in our side-indicator stays intact, Pampa Energia is primed to keep on outperforming the rest of the market.
Mid-cap telco Frontier Communications (FTR - Get Report) hasn't fared so well in 2015. Since the beginning of the year, this $6 billion stock has lost about 21% of its market value, lagging the S&P by a broad margin. But shares are starting to show signs of life this fall thanks to the exact same price pattern that's in play in shares of Pampa Energia. The big breakout level to watch from here is up at $5.50.
Why all of that significance at that $5.50 level? It all comes down to buyers and sellers. Price patterns, such as this ascending triangle pattern in Frontier, 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 Frontier's shares.
The $5.50 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 $5.50 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
This setup may not be "textbook" per se, but the trading implications are the same in Frontier as in Pampa Energia on a breakout above $5.50.
Mid-cap health care stock Amsurg (AMSG) has been in rally-mode in 2015. This surgery center operator is up 42% since the beginning of the year. More recently, though, shares of Amsurg have been churning sideways. The good news for investors is that that sideways grind isn't the red flag it seems to be. In fact, it's setting the stage for another leg up in Amsurg this fall.
The sideways price action in Amsurg is a rectangle pattern. It gets its name because the pattern basically "boxes in" shares between horizontal support and resistance lines. For Amsurg, the levels to watch are resistance up at $85 and support at $76. Rectangles are "if/then patterns" -- if Amsurg breaks out through resistance at $85, then traders have a buy signal. Otherwise, if this stock violates support at $76, then the high-probability trade is a sell.
Because Amsurg's prior trend was up at the start of this year, it favors breaking out above $85. Still, it's important to be reactionary and wait for Amsurg to exit the rectangle before you take sides on this trade. Technical analysis is a risk management tool, not a crystal ball, and this doesn't become a high-probability buy until our price ceiling gets taken out.
It's no secret that the energy sector has been the space to avoid in 2015; this year, the big energy indices are all down double digits. But refiners have been the exception to the rule -- and $10 billion petroleum refiner HollyFrontier (HFC - Get Report) has been a great example of the relative strength in the refining business. In fact, shares of HollyFrontier are up 27% so far this year. That number looks likely to grow before the end of the year, and you don't need to be an expert technical trader to figure out why.
HollyFrontier has spent all year bouncing its way higher in an uptrending channel, giving investors a half-dozen low-risk, high-reward opportunities to get into this stock along the way. HollyFrontier's uptrend is formed by a pair of parallel trend lines that identify the high-probability range for shares to stay stuck within. Every test of trend line support in 2015 has been a great buying opportunity, and we're getting another test today following Monday's 5.6% correction. From here, it makes sense to buy the next bounce higher.
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 HollyFrontier can actually still catch a bid along that line before you put your money on shares.
Last up on our list of breakout trades is UK-based telco BT Group (BT) . This stock has spent most of the year moving sideways -- shares are practically unchanged since the beginning of February. But while that price action may seem unremarkable, the journey to breakeven has been a little more interesting. And this fall, after correcting from BT's 52-week highs earlier this summer, a classic reversal pattern points to an upside move.
BT Group 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 $68 level in BT Group.
Momentum, measured by 14-day RSI, provides some extra evidence for the reversal. 14-day RSI, our momentum gauge, has been in an uptrend since August, making higher lows during each of BT's three price lows. That's a bullish divergence that indicates that buyers are quietly stepping back into this stock.
Don't get thrown off by the abundance of gaps on BT Group's chart right now. Those gaps, called suspension gaps, are caused by overnight trading in shares of BT on the London Stock Exchange, where shares are dual-listed. Those gaps can be ignored for trading purposes.