Updated with additional comments from Jim Cramer.
Another day, another big selloff in the broad market.
The S&P 500 lost another 2.5% during Wednesday's session, bringing its year-to-date loss to more than 7%. At the same time, for the Nasdaq Composite, investors are looking at a nearly 10% loss in the first eight trading sessions of 2016. Needless to say, it's not been an auspicious start to the new year.
And if you were somehow limited to investing only in the big market indices, it'd be an ugly situation indeed. The silver lining to those black clouds is that there are some corners of the market that are actually working right now, however small they may be.
As it turns out, some of Wall Street's biggest stocks are signaling a potential rebound trade in January. To find the stocks that still make sense to own in this market, we're turning to the charts for a technical look at five blue chips that are close to triggering buy signals.
First, a little on the technical toolbox we're using here: Technical analysis is 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.
Up first is Reynolds American (RAI) , one of 2016's few strong performers. Since the calendar flipped to January at the start of last week, this $69 billion tobacco stock has managed to claw its way 2.7% higher, besting the S&P by double digits on a relative basis. Don't worry if you've missed out on the outperformance so far. It look like Reynolds' best days are ahead of it this year.
Reynolds American is currently forming an ascending triangle pattern, a bullish price setup that's formed by horizontal resistance up above shares at $49 and uptrending support to the downside. Basically, as Reynolds has bounced in between those two technically-significant price levels, shares have been getting squeezed closer and closer to a breakout above our $49 price ceiling. If shares can catch a bid above that $49 level, then we've got our buy signal.
This isn't the first time we've seen an ascending triangle trade in Reynolds American. As recently as this past July, shares were showing off the exact same setup. The breakout from there propelled shares 26% higher by time 2016 rolled around. A similar move looks likely if buyers can manage to sustain this stock above $49. Once that breakout happens, the 50-day moving average looks like a good place to park a protective stop.
$36 billion IT consulting stock Infosys (INFY - Get Report) has been under pressure in the last few months. Shares peaked back in early October, and they've been tracking lower ever since, shedding about 14% of their market value -- or about triple the drop of the S&P 500 over that same stretch of time. But Infosys has started showing some relative strength in 2016, and shares are beginning to look "bottomy" in the intermediate-term.
Infosys is currently forming a double bottom pattern, a bullish reversal setup that looks just like it sounds. The double bottom is formed by a pair of swing lows that bottom out at approximately the same price level. The buy signal comes on a breakout through the peak that separates those two troughs. For Infosys, that breakout level to watch is resistance up at $17. Shares ended yesterday's session within grabbing distance of that $17 price level.
Why all of that significance at the $17 level? It all comes down to buyers and sellers. Price patterns, such as this double bottom setup in Infosys, 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 Infosys' shares themselves.
The $17 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 $17 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 get into the Infosys trade early; it doesn't become a high-probability trade until $17 gets taken out.
Don't let yesterday's nearly 5% drop in shares of home improvement retailer Home Depot (HD - Get Report) fool you. This stock looks ready for a rebound in January. The good news is that you don't need to be an expert technical trader to figure out why. Instead, the price setup in this $161 billion retail stock is about as simple as they get.
Home Depot has been bouncing its way higher in a well-defined uptrending channel since last August. The uptrend in Home Depot is formed by a pair of parallel trendlines that have identified the high-probability range for shares over that stretch. Put simply, every test of the bottom of that price channel so far has provided investors with a high-probability buying opportunity, and shares are testing that level for a fifth time this week. The buy signal comes on the next bounce higher.
Risk management is critical to any well thought-out technical trade, including this one. The 200-day moving average has been acting like a decent proxy for support since the uptrend in Home Depot started, if an extra conservative one. That makes it a logical spot to place a protective stop if you decide to buy the next up-day.
Alphabet (GOOGL - Get Report) is another major "buy-the-dips stock" to watch right now. This tech giant has been in its own uptrend since July, bouncing its way higher on each of the last four tests of trend line support. Now we're starting to see what looks like bounce No. 5. If Alphabet can continue that bounce into today's session, consider it a buy signal.
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 Alphabet can actually still catch a bid along that line before you put your money on shares.
From a fundamental perspective, Alphabet is a holding in Jim Cramer's Action Alerts PLUS portfolio."Alphabet remains poised to succeed in 2016, both from a company and stock perspective," he wrote recently. He also said:
"This stock, after this decline, is now selling at about 20 times earnings even as it could grow at about 18% this year. You are getting far more growth than the average S&P 500 company gives you at a much lower price-to-earnings multiple than you deserve, but this is a very hard market and people are selling everything they can, so that kind of detail may not matter now. It will later."
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Last up on our list of technical trades is Walmart (WMT - Get Report) . Walmart showed shareholders some nasty performance in 2015, but this retail giant has actually been one of the best-performing big stocks since the start of 2016, no small feat. Like Home Depot and Alphabet, Walmart is a trend play -- the big difference here is that the catalyst in Walmart is the fact that it's breaking free of its downtrend in January.
Walmart spent most of 2015 in a well-defined downtrend. Like clockwork, shares reversed lower every time they hit their head on that downsloping resistance line. But shares bottomed back in November, and they did something even more telling at the start of January -- they actually broke out through the top of that prior downtrend. That signals a major change in trend for Walmart, and it's been playing out so far in 2016.
From here, shares could correct for a session or two before they come back down to the bottom of their newfound uptrend (the blue trend channel on the chart above). The optimal buying opportunity comes in buying Walmart as close to the bottom of that blue trend channel as possible. That new uptrend is important to watch -- Walmart can't re-enter the downtrend from last year unless it violates its new uptrend first. If you decide to jump into this stock, I'd suggest putting a stop loss on the other side of the 50-day moving average.