Christmas is right around the corner, but investors aren't finding any pleasant surprises in their stockings of late. In the last month, the S&P 500 index has shed more than 3.25%. While that may not sound like a colossal decline in the broad market, it is a big correction for a one-month span, and it represents a large move lower on an annualized basis.
Perhaps more important, the correction came after a sharp rally in October, shoving the S&P into negative territory just as 2015 draws to a close.
Year-to-date, the S&P is still 1.8% shy of its starting point from a price standpoint. Luckily, that performance stat doesn't tell the whole story, particularly with respect to the individual stocks that make up the big market averages. A handful of stocks look primed for breakouts as we head into the holidays. Today, we'll take a technical look at how to trade five of them.
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.
Apartment REIT Equity Residential (EQR - Get Report) has been showing some strength lately. Since the start of September, this $29 billion stock has managed to rally more than 16% on a total returns basis, outperforming the S&P's performance over that stretch by about triple. And while Equity Residential had been showing some cracks as recently as the beginning of this month, this price setup has evolved into something that looks bullish for traders who've missed the move in this stock.
Equity Residential is currently forming an ascending triangle pattern, a bullish continuation setup that's formed by horizontal resistance up above shares (at $81 in this case), and uptrending support to the downside. Basically, as shares bounce in between those two technically significant price levels, Equity Residential has been getting squeezed closer and closer to a breakout above our $81 price ceiling. That breakout is our buy signal.
The side indicator to watch in Equity Residential right now is relative strength (not to be confused with similarly-named RSI at the top of the chart). Our relative strength line is holding its uptrend from the beginning of the summer, indicating that this stock is still outperforming the rest of the market long-term. As long as that uptrend in relative strength stays intact, Equity Residential should keep on outperforming the rest of the market.
Crown Castle International
We're seeing the same setup in shares of another REIT:- $28 billion wireless infrastructure stock Crown Castle International (CCI - Get Report) . Like Equity Residential, Crown Castle is currently forming a pretty textbook ascending triangle setup following its rally from September's lows. From here, $87 resistance is the big breakout level to watch in this stock.
Why all of that significance at the $87 level? It all comes down to buyers and sellers. Price patterns, like this ascending triangle setup in Crown Castle International, 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 Crown Castle's shares.
The $87 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 $87 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Remember to be reactionary here. Upside in Crown Castle doesn't become a high-probability trade until shares are able to catch a bid materially above $87.
2015 has been a rough year for $14 billion communications stock CenturyLink (CTL - Get Report) . Since the calendar flipped to January, CenturyLink has been in selloff-mode, shedding more than 36% of its market value year-to-date. But the selloff could be coming to a close this winter. Here's how to trade it.
CenturyLink's downtrend found a major support level back at the end of the summer, finally establishing a price floor that shoved shares higher alongside the rest of the market in October. This month, shares are testing a bounce off of that support level for a second time. That price action is setting up a long-term double bottom pattern, a bullish reversal trade that looks just like it sounds.
The double bottom in CenturyLink is formed by a pair of swing lows that bottom out at approximately the same price level. The buy signal comes on a breakout above the peak that separates those two troughs; for CenturyLink, that breakout level to watch is $28. Don't get tempted into buying CTL early this winter. Shares have been in a downtrend all year long, and buyers aren't back in control until this stock is able to stay above $28 for the first time in five months. From a risk/reward standpoint, being late is a better payoff than being early here.
Good news: You don't need to be an expert technical trader to figure out what's happening in shares of $64 billion online travel agency Priceline Group (PCLN) . Instead, the price action in this big travel stock is about as simple as it gets -- and shares are closing in on a major buying opportunity this week. Simply put, Priceline is a "buy the dips stock" this winter, and shares are dipping in December.
Since the middle of the summer, Priceline has been bouncing its way higher in a well-defined uptrending channel. That uptrend is formed by a pair of parallel trend lines that have identified the high probability range for shares to stay stuck within. Put simply, every test of the bottom of that price channel this fall has provided investors with a high-probability buying opportunity. And shares are retreating for a seventh test of support this week. From here, it makes sense to wait for the next bounce.
Why wait? 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 a bounce to happen first, you're ensuring Priceline can actually still muster buying pressure along that line before you put your money on shares.
First Cash Financial Services
Last on our list of potential breakout stocks is small-cap pawn and payday lending stock First Cash Financial Services (FCFS - Get Report) . First Cash Financial is another stock that's had a rough run in 2015: since the start of the year, this billion-dollar firm has seen its market valuation decline by a third. But a classic reversal pattern indicates that long-suffering shareholders could be in for a reprieve here.
First Cash Financial is currently forming an inverse head and shoulders pattern, a bullish reversal setup that signals exhaustion among sellers. The pattern is formed by 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". Right now, that's the $40 level in First Cash Finanical.
So does momentum. Momentum, measured by 14-day RSI, adds some extra confidence to this trade. Our momentum gauge has been in an uptrend since the start of the summer, making higher lows on each of the reversal-points on First Cash Financial's price setup. That's a bullish divergence that indicates buying pressure is quietly building in shares. Wait for $40 to get taken out before trying to buy this turnaround trade.