U.S. markets are back on track for a double-digit ending in 2016. With just 45 days left until the calendar flips over to 2017, the S&P 500 is sitting on total returns of 8.6%, putting the big market average on pace for a 10% return this year.
That's not to say that it's been an easy year to make money as a stock market investor - 2016 has been a year of false starts, sideways grinds, and plenty of opportunities to sell at the wrong moment. So, odds are that the vast majority of individual investors are meaningfully underperforming the S&P here.
That's the bad news. The good news is that there's still time to take advantage of some big breakout opportunities in stocks this fall...
Following last week's post-election bounce, the S&P 500 is back to less than 1% away from hitting new all-time highs, and a new high water mark in the stock market averages could help pull more large-cap stocks over the edge of breakout territory. To find the stocks that stand the biggest chance of upside moves from here, we're turning to the chart for a technical look at five big breakout trades that could lead the S&P in the final stretch of the year.
First, a quick note 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 the list is $72 billion chipmaker Texas Instruments (TXN) , a stock that's been leading the pack all year long. While the average tech stock is up 11.5% on a total returns basis in 2016, Texas Instruments has tripled those gains, handing investors a 33.4% rally year-to-date. But don't worry if you've missed out on that big move in Texas Instruments so far - the price action is pointing towards a second leg higher in shares.
Texas Instruments is currently forming an ascending triangle pattern, a bullish continuation setup that's formed by horizontal resistance up above shares at $72, and uptrending support to the downside. Basically, as Texas Instruments bounces in between those two technically important price levels, it's been getting squeezed closer and closer to a breakout through its $72 price ceiling. When that breakout move happens, we've got our high-probability buy signal in TXN.
The side-indicator to watch in Texas Instruments is relative strength, the line down at the bottom of the stock chart. TXN's relative strength line has been in an uptrend of its own stretching back to January, signaling that this stock's outperformance hasn't been slowing. Wait for $72 to get taken out before building a position in Texas Instruments - shares are within striking distance of that key level this week.
We're seeing the exact same trading setup in shares of $116 billion oilfield services giant -- and Action Alerts PLUS holding -- Schlumberger (SLB) . Like Texas Instruments, Schlumberger is showing off a textbook example of an ascending triangle setup, a price pattern that's been forming since the middle of August. For Schlumberger, the breakout buy signal comes on a move through resistance up at $84.
What's so special about that $84 price level? Put simply, it identifies a crucial level for buyers and sellers. While the ascending triangle pattern on Schlumberger's chart is a useful way to identify where the buy signal happens, simply drawing lines on a chart isn't the thing that makes it tradable. Instead, the "why" for SLB comes down to basic supply and demand for this stock's shares themselves.
The $84 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 been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above $84 so significant - the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
S&P Global (SPGI) hasn't done much lately. Shares of the $31 billion ratings agency have been tracking sideways for the last three months and change, churning following a 24% upside move that started the year. But that sideways grind in shares of S&P Global are actually setting the stage for another leg higher - here's how to trade it...
S&P Global is currently forming a rectangle pattern, a price setup that gets its name because the pattern basically "boxes in" shares between horizontal support and resistance lines. For SPGI, the levels to watch are resistance up at $127.50 and support at $120. Rectangles are "if/then patterns" -- put a different way, if S&P Global breaks out through resistance at $127.50, then traders have a buy signal. Otherwise, if this stock violates support at $120, then the high-probability trade is a sell. It's also worth noting that SPGI is touching the bottom of its rectangle pattern at the same time it's touching long-term support from February's lows - that adds credence to the likelihood of a bounce to test $127.50 in the next few trading sessions.
Because S&P Global's prior trend was up coming off of its early 2016 lows, this stock favors breaking out above $127.50. Still, it's important to be reactionary and wait for S&P Global 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.
Meanwhile, things are looking pretty straightforward in shares of $68 billion banking stock Banco Santander (SAN) . Since bottoming back in late June, Santander has been working its way higher in a well-defined uptrending channel. And that simple price pattern suggests Santander is still a "buy the dips stock" this fall...
The uptrend in Santander is formed by a pair of parallel trendlines that have managed to corral almost all of this stock's price action since this summer. In short, every test of the bottom of the channel over that uptrend period has provided a low-risk, high-reward buying opportunity in SAN. So, as shares touch that same support level for a sixth time 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, invalidating the upside trade). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring Santander can actually still catch a bid along that line before you put your money on shares.
Rounding out our list of big-cap breakouts is oil and gas supermajor Exxon Mobil (XOM) . Exxon started the year off strong, buoyed by a rebound in oil prices. But shares have been fading for the last several months alongside the rest of the energy sector, backsliding about 10% from their peak in July. The good news for shareholders is that Exxon looks "bottomy" following that prolonged correction.
Exxon has spent the last several months 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 at approximately the same level (the shoulders), separated by a lower low (the head). The buy signal comes on a move through Exxon Mobile's neckline, currently at $87. The long-term nature of the inverse head and shoulders pattern on XOM's chart means that it comes with equally long-term upside implications once the breakout above $87 happens.
Price momentum, measured by 14-day RSI at the top of Exxon's chart, is the side-indicator to watch here. That's because our momentum gauge has been making a series of higher lows over the course of the inverse head and shoulders pattern, a bullish divergence that indicates buying pressure has been ramping up. Once shares crack $87, the path is clear for a re-test of this summer's highs at $94.