BALTIMORE (Stockpickr) -- The S&P 500 pushed its way into new highs yesterday, ending Wednesday's session at a new record once again. That new high water mark for stocks comes in spite of some serious macro headwinds -- and we've got earnings to thank for it.
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In fact, so far, this has been one of the most successful earnings seasons of the last few years. With nearly half of the firms in the S&P 500 already reported, 77% of those have beaten analyst estimates for the second quarter. That overwhelming beat rate is a big factor in the S&P's continued run higher, and it's trickling down to create tradable setups in the individual names this week.
That's why, today, we're turning to the charts for a technical look at five big stocks to trade for gains.
If you're new to technical analysis, here's the executive summary.
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Technicals are 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 high-volume stocks to trade this week.
Delphi Automotive
Up first on our list of large-cap trades is Delphi Automotive (DLPH), a name that's already turned out some strong performance in 2014. Year-to-date, Delphi has rallied more than 14%, doubling the S&P's gains over that same stretch.
But don't worry if you've missed the move so far. DLPH looks ready to kick off a second rally leg this summer. Here's how to trade it.
Delphi is currently forming an ascending triangle pattern, a bullish price setup that's formed by horizontal resistance above shares (at $70) and uptrending support to the downside. Put simply, as this stock bounces in between those two technically-important price levels, it's getting squeezed closer to a breakout above that $70 price ceiling. When that breakout happens, it's time to be a buyer.
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The 50-day moving average has been a pretty good proxy for support over the course of this setup (even if it's been a little high), making it a logical place to keep a protective stop in Delphi. I'd recommend locking your stop loss $1 below the 50-day to avoid false stop-outs.
Henry Schein
We're seeing the exact same price setup in shares of $10 billion health care vendor Henry Schein (HSIC). Like Delphi, HSIC is currently forming an ascending triangle setup, in this case with resistance up at the $120 level. While this pattern has been setting up for longer than the one in DLPH, the trading implications are exactly the same: buy the breakout above $120.
Why all of that significance at that $120 level? It all comes down to buyers and sellers. Price patterns 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 Henry Schein's stock.
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The $120 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 $120 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Since this is a longer-developing setup, the 200-day moving average is a more appropriate place to park a stop loss.
China Mobile
At a glance, Chinese communications giant China Mobile (CHL) hasn't done much this year. Since the calendar flipped to January, shares of CHL have only managed to move 4% higher. But it hasn't been a tepid climb; CHL sold off into the first quarter, only to rebound hard starting at the end of March. Now China Mobile is a "buy-the-dips stock," and you don't need to be an expert technical trader to see why.
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The price setup in China Mobile is about as basic as they get. Shares of the $218 billion phone carrier are bouncing their way higher in an uptrending channel, a pair of parallel trend lines that identify the high-probability range for shares of CHL to stay within. When it comes to trend channels, up is good and down is bad -- it's really just as simple as that. And because every test of trend line support has shown traders an optimal entry opportunity in CHL, it makes sense to hold out for the next correction back down to support.
Put another way, CHL is a buy-the-dips stock, but we've got to wait for the next dip.
For China Mobile, the side indicator to watch is relative strength, the lower subchart on the chart above. CHL's relative strength line has kept its uptrend intact since March, which means that this stock isn't just moving higher -- it's also outperforming the S&P 500 along the way. As long as relative strength keeps making higher lows, this stock should keep beating the rest of the market.
BP
Integrated oil and gas giant BP (BP) may not have much in common with a firm such as China Mobile, but it is basically showing traders the exact same price chart right now. The key difference is that BP's chart is coming off of the fourth test of trend line support since the start of the year. It makes sense to buy that bounce this week.
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Waiting for a bounce is important for two key reasons: It's the spot where shares have the furthest 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 you know you're wrong). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring BP can actually still catch a bid along that line before you put your money on shares.
We've already seen the bounce in BP. Buyers should just be sure to keep a stop on the other side of that blue trend line support level. If it gets violated somewhere along the way, the uptrend is broken, and you won't want to own this trade anymore.
As of the most recently reported quarter ended March 31, BP was one of Seth Klarman's top holdings and also showed up in David Einhorn's Greenlight Capital portfolio.
Rockwell Automation
Last up on our list of big-name trades is $17 billion industrial automation stock Rockwell Automation (ROK). Rockwell is looking bullish thanks to a classic technical pattern that started forming in shares back in March. Now the breakout level to watch is up at $127.50.
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ROK is forming an inverse head and shoulders pattern, a technical setup that indicates 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" level, currently right at $127.50 resistance. This isn't a textbook pattern (it's coming in at the top of ROK's recent range, not the bottom), but that doesn't change the trading implications on a move through the $127.50 level.
Momentum, measured by 14-day RSI, is the confirming indicator to look at in this stock. Our momentum gauge has been making higher lows all year long, making its way higher in a shallow uptrend – since momentum is a leading indicator of price, it adds some confidence to an upcoming breakout in ROK. When $127.50 gets taken out, it becomes a high-probability buy signal.
To see this week's trades in action, check out the Technical Setups for the Week portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
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At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to
TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.Follow Jonas on Twitter @JonasElmerraji
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