As the chance of Santa Claus rally fades, investing in solid companies heading into next year can provide refuge from further market declines. While the broader market, tracked by the SPDR S&P 500 (NYSE:SPY) ETF, is down 3.46% over the last year there, are many stocks that are in positive territory for the year. From these stocks there are a handful that are forming continuation patterns - chart formations that indicate the potential for further upside. A flag pattern forms when the price consolidates after a move higher, and while the pattern does not guarantee a move higher, an upside breakout of the pattern is a positive signal.

Kraft Foods (NYSE:KFT) is up 14.15% to $36.22 from $31.73 one year ago. In December, the stock has traded between the 52-week high of $36.90 and $36. This range of approximately $1 was preceded by a move higher in late October, from $34 to the 52-week high. This price action created a flag formation. A rise above $37 will provide a breakout to the upside with a target of $39 to $40. On-balance volume is trending higher and would confirm the upside breakout were it to occur. On the other hand, a drop below $36 is likely to be short-term bearish, but there is further support at $34. This should provide another buying opportunity between $35 and $34 with a stop just below $34, which is also the 200-day moving average. (For more, see Technical Analysis: Support And Resistance.)

Spectra Energy (NYSE:SE) is up 17.84% to $29.19 from $24.77 one year ago. This stocks has also been consolidating below the 52-week high at $30.04. The rally toward the end of November was not spectacular, which means the stock is not likely to explode higher, although there is still likely upside potential after the stock finishes consolidating after the strong October rally (a flag within a flag). A rise above $30 (especially a close price) is a bullish signal for the stock with an initial target of $32. The rally could extend to $35 over the longer-term if it can move through $32. $27.50 has not been seen since November 1, and a drop below that level is negative for the stock, as there is little support until $26, which is just below the 200-day moving average. Small pullbacks between $29 and $28 provide buying opportunities with a stop below $27.50. On-balance volume is rising but remains below July levels; this is a potential warning signal and OBV should rise if it is to confirm an upside breakout.

General Mills (NYSE:GIS) is up 9.09% to $39.59 from $36.29 one year ago. After a move higher in late November, this stock is also forming a flag pattern. Even if the flag does not hold, there is support in the $38 region, which should be a good buying opportunity if the stocks pulls back. A drop below $37.50 (the 200-day moving average) is a negative signal. If the stock can move back toward $40.50 that will break the flag to upside and provide a target of $42 to $43. Resistance is the 52-week high at $40.72.

Kroger (NYSE:KR) is up 8.05% this year, but unlike the prior stocks mentioned, the current price of $23.50 is a ways away from the 52-week high ($25.85). A flag has formed, after the November rally, between $23.40 and $24.20. A rise above $24.20 will break the pattern to the upside and provide a target of $25.50. There is also an inverse head-and-shoulders pattern that began in August and recently broke to the upside in mid-December. The target for the inverse head-and-shoulders pattern is $26. A drop below $23.40 is short-term bearish, but support is likely to develop before $22. Declining on-balance volume indicates some underlying weakness. A drop below $21 is negative. (For more, see Analyzing Chart Patterns: Flags And Pennants.)

The Bottom Line
Since mid-December, the market has been declining, decreasing the likelihood of a Santa Claus rally. The weak market this year has not been without opportunities, though, and there is still upside potential in many stocks. The four stocks mentioned have formed flags - a continuation chart pattern. If the stocks break above the flag formations, it is a positive signal. On the other hand, if the formations are broken to the downside it indicates at least short-term bearishness. Price is ultimate indicator, but ideally, on-balance volume should rise to confirm an upside breakout ... should it occur. (For more, Analyzing Chart Patterns: Introduction.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Charts courtesy of stockcharts.com

At the time of writing, Corey Mitchell did not own shares in any of the companies mentioned in this article.

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