The trying start to 2016 continues to wear on stock market investors this week. U.S. markets managed to stabilize and turn higher in the second half of Wednesday's trading session, but not before reaching new 52-week lows around midday.
That's a pretty ugly stat.
But if you've been a regular reader of this column, it shouldn't come as a big surprise that the big market indices are only telling you part of the story. While the S&P may be hitting new lows for the year, a surprisingly big chunk of the market is actually working right now.
For instance, 294 of the stocks in the broader, more inclusive Russell 3000 index have hit a 52-week high sometime in the last month. That's more or less 10% of the whole index. So while it may be a stretch to say that stocks are looking great right now, it's simply not true that everything's in the gutter, either.
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 on our list is a true garbage stock -- and I mean that in the best way. I'm talking about Waste Management (WM - Get Report) , the $23 billion trash collection company. Waste Management has been a strong performer in the last six months or so, climbing 8.6% higher over that stretch on a total returns basis. Don't worry if you've missed that move; shares of Waste Management look primed to kick off a second leg higher this winter.
Waste Management is currently forming an ascending triangle pattern, a bullish continuation setup that's formed by horizontal resistance up above shares (at $54.50 in Waste Management's case), and uptrending support to the downside. Basically, as Waste Management bounces between those two technically significant price levels, shares have been getting squeezed closer and closer to a breakout through our $54.50 price ceiling. When that breakout happens, it's officially time to be a buyer.
Relative strength (not to be confused with RSI at the top of the chart) adds some extra confidence to the upside in Waste Management right now. That's because this stock's relative strength line is holding its uptrend line from last summer, indicating that shares are still beating the broad market in the long term. If $54.50 gets taken out, then we've got our signal that buyers have regained control of shares.
We're seeing the exact same setup in shares of $24 billion housing REIT AvalonBay Communities (AVB - Get Report) . Like Waste Management, AvalonBay has spent the last couple of months forming a textbook ascending triangle pattern. For this big apartment landlord, the buy signal comes on a breakout above resistance up at $185.
Why all of that significance at the $185 level? It all comes down to buyers and sellers. Price patterns, such as this ascending triangle setup in AvalonBay, 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 AvalonBay's shares themselves.
The $185 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 $185 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 AvalonBay trade early; it doesn't become a high-probability trade until $185 gets taken out.
We're revisiting shares of Infosys (INFY - Get Report) . When we looked at this $36 billion IT consulting stock last week shares were looking ready to break out of a double bottom pattern. Sure enough, that's just what happened. So, while the broad market has backslid another 4.1% since this time last week, Infosys has actually managed to rally 7.7% in the intervening days.
The question for anyone who bought last week's breakout (or wished they did) is what to do next.
The breakout in Infosys was quick and easy to miss. But since moving up above $17 resistance, this stock has been retreating back down toward that important price level again. That's not a cause for concern. Instead, it's a price move called a "throwback," and it's giving traders a second chance at a low-risk entry in Infosys.
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 $17 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 Infosys, not a red flag. From a risk/reward standpoint, the next bounce off of $17 is a buying opportunity.
Now onto something simpler. $9 billion luxury handbag maker Coach (COH) has seen a tumultuous run in the last year or so. Since this time in 2015, shares have shed about 13% of their market value. But something big changed back in September that changed this stock's trajectory, pointing shares higher in a well-defined uptrend. Coach has been a "buy-the-dips stock" ever since; and the next bounce higher looks like a solid buying opportunity in this handbag maker.
The uptrend in Coach is formed by a pair of parallel trend lines that have identified the high probability range for shares for the last five months or so. Put simply, the last two tests of the bottom of that price channel so far have provided investors with a high-probability buying opportunity, and shares are testing that same support level for a third time this week.
The buy signal comes on the next bounce higher -- which could potentially happen in today's session.
We're seeing the exact same setup in shares of Nokia (NOK - Get Report) . Like Coach, Nokia has been bouncing its way higher in a well-defined uptrending channel. So far, investors have seen five bounces off of that trendline -- and Nokia is testing trendline support for a sixth time here. Wait for the bounce before you buy.
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 Nokia can actually still catch a bid along that line before you put your money on shares.
Like with any technical trade, risk management is critical if you decide to take part in the Nokia trade. Prior support at $6.90 looks like a logical place to park a protective stop. That's because, if $6.90 gets violated, then Nokia's uptrend is over, and you don't want to own it anymore. Meanwhile, a bounce off of support this week tells us that buyers are back in control.