Instead, it's a lot easier to match up a chart of price action right now with the rally that Mr. Market gave us from the end of 2011 through the first quarter of this year. So, with the S&P 500 coming off a correction, there are ample buying opportunities right now in stocks.
That's why we're taking a technical look at five big names that are tradable this week.
If you're new to technical analysis, here's the executive summary.
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 percent 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 the charts of five high-volume stocks to trade for gains.
Royal Bank of Scotland Group
First up is Edinburgh-based bank Royal Bank of Scotland Group. Financial stocks have been showing surprising strength over the last several months, and RBS is no exception — shares of the U.K. banking giant have rallied close to 50 percent since the start of 2012. But now, a technical price setup in shares points to even more upside.
That's because RBS is forming a textbook ascending triangle pattern. The ascending triangle is a setup that's formed by a horizontal resistance level to the upside (in this case at $9.25) and uptrending support below shares. As RBS bounces in between those two significant price levels, shares are getting squeezed closer and closer to a breakout above that $9.25 ceiling. When the breakout happens, traders have their buy signal.
At first glance, you may notice that there are a lot of gaps in the price chart for RBS — these gaps, called suspension gaps, are just the result of off-hours trading on the London Stock Exchange. They can be ignored for trading purposes.
We're seeing the same setup right now in shares of $7.3 billion analytical instrument maker Waters Corp.. Waters has been trending lower for much of the last two quarters, but it looks like shares bottomed at the start of the summer — the ascending triangle would officially break WAT out of that range.
For Waters, the resistance level in play comes at $86 — when this stock prints above that level, traders have a buy signal. Whenever you look at a price chart, it's important to think in terms of buyers and sellers, not just shapes; after all, patterns like the ascending triangle don't work because of magic or geometry. Instead, it all comes down to supply and demand in the market.
That resistance level at $86 is a price where there's historically been a glut of supply of Waters shares that has overwhelmed buying pressure. In other words, it a price where sellers were more eager to sell and take gains than buyers were to keep buying. A breakout above $86 means that increasingly eager buyers have absorbed the excess supply, so it makes sense to jump in and buy. When you do, keep a tight stop.
Kimberly Clark is showing traders an interesting setup of its own right now. Shares of Kimberly spent the first half of this year rallying, but when the broad market corrected lower, Kimberly didn't — instead, it corrected sideways for the second half of the year. That's a big signal that Kimberly is showing off some outsized relative strength right now.
More importantly, the sideways trading that Kimberly's been showing us has been orderly: All of the stock's price action has been consolidating in a price pattern called a rectangle. Sideways consolidations aren't something to be too worried about — instead, they're completely normal, especially after a big move higher. They give investors an opportunity to catch their breath and figure out their next move.
At the top of the rectangle, we've got a resistance level at $87.50, and at the bottom, we've got horizontal support at $82. Essentially, we're waiting for a breakout through one of those prices to give us our trade signal. Typically, rectangles are continuation patterns, which means that they resolve in the same direction as previous price action. For Kimberly, that makes more upside a likely outcome in November. Either way, it's crucial to wait for the move outside of the channel before putting any money on the line with this stock — you want current investors to make up their minds about Kimberly before you do.
The last few months have been rough going for shares of U.K.-based Vodafone Group . The global mobile communications giant has dropped more than 13.5 percent in the last quarter, shoved lower as a textbook bearish pattern triggered and sent shares toward support. But now that this stock has caught a bid, there's a buying opportunity again.
A head-and-shoulders top triggered back in late October when Vodafone broke through the neckline level at $27.50. After that, shares fell to their nearest strong support level at $24.50, a price level that got pointed out back in the middle of May, the last time Vodafone tested its "price floor." Now, as with then, shares are bouncing hard off of support. That means that investors looking for an opportunity to buy shares of Vodafone have a lowered risk profile if they pick up shares now.
The broken downtrend in momentum adds some extra evidence to Vodafone's change in trend. Momentum is a leading indicator of price, so the move to an uptrend in RSI bodes well for Vodafone buyers right here. If you decide to pick up shares here, it makes sense to put a protective stop just on the other side of $24.50.
Not all of the setups we're looking at today are bullish — take Pfizer, for instance. The $181 billion pharmaceutical giant looks a whole lot like Vodafone right now; the only problem is that it looks like Vodafone back in October, not now after the bounce off of support.
Pfizer is forming a head and shoulders top, a pattern that indicates exhaustion among buyers — it's formed by two swing highs that top out at around the same level (the shoulders), that are separated by a higher high (the head). A breakdown below the neckline at $23.50 is the sell (or short) signal for Pfizer. A closer look at the setup in Pfizer reveals that this stock is showing the same pattern in multiple timeframes — there's a mini head and shoulders top that forms the head. That sort of a nested pattern is actually pretty common, and it gives traders a pretty good indication of how Pfizer will react if it breaks its longer-term neckline at $23.50.
The head and shoulders may be a popular pattern, but the research shows that it's still a valid one: A recent academic study conducted by the Federal Reserve Board of New York found that the results of 10,000 computer-simulated head-and-shoulders trades resulted in "profits [that] would have been both statistically and economically significant." Just remember that the trading signal only comes if Pfizer moves below that neckline level.
—By TheStreet.com Contributor Jonas Elmerraji
Additional News: 'Short-Term Bull Signal' at This S&P Level: Pro
Additional Views: Why Investors Like Pharma Stocks
CNBC Data Pages:
At the time of publication, Jonas Elmerraji had no positions in stocks mentioned.