STRATEGIES

This month’s scan of the most overbought Dow’s stocks has many of the recent top performers and the monthly charts of these four, says MoneyShow’s Tom Aspray, makes them attractive buy candidates on a correction.

The impressive stock market gains so far in 2013 has certainly gotten the attention of both the media and the investing public. Anyone who doesn’t know that the Dow Industrials closed above 14,000 Friday must be living in a cave.

Most also know that historically a higher close in January has meant that stocks will be up for the entire year. This, of course, is based on average gains and as I pointed out on Friday the yearly performance after a higher January was varied widely. The last time the market had this strong a close was 1997 and it ended the year with a 31.7% gain.

Even in 1997 stocks peaked on February 18 and then underwent a 10.4% correction. Therefore the monthly starc band scan of the stocks in the Dow Industrials can help identify those stocks to buy when the market corrects.

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For those who are not familiar with these monthly scans, it identifies those stocks that are closest to either the upper (starc+) or lower (starc-) bands. When a stock is near the starc+ band, it is a high-risk buy but that does not mean the stock cannot still go higher. If a stock closes above the monthly starc+ band for several consecutive periods, then it becomes increasingly more vulnerable.

At the top of this month’s list is The Travelers Companies (TRV), which the table indicates closed the month at $78.46, 3.5% below its monthly starc+ band. It was also one of the month’s best performers, up 9.2% while the second stock on the list, Pfizer Inc. (PFE) was up 8.7%.

A close analysis of the monthly charts allows one to better identify those that are just beginning a new run to the upside and are likely the best ones to buy on a correction. Let’s take a look at those stocks whose monthly charts suggest have the best upside potential.

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Chart Analysis: McDonald’s Corporation (MCD) was the star performer in 2011, up 30.7%, but it was followed by a 4.4% loss in 2012. The monthly chart shows a normal corrective pattern from the January 2012 high at $102.22.

  • The January close above the September-October 2012 highs at $94-$94.16 highs suggests that the correction was over.
  • The 127.2% Fibonacci upside retracement target from the corrective pattern is at $107.41.

  • The monthly relative performance has turned up from long-term support, line c, but is still well below its WMA.

  • The RS line did confirm the highs made in early 2012, line b.

  • The monthly OBV has moved above its WMA after holding above the support at line d.

  • The weekly technical studies (not shown) have moved above their MAs indicating that a new uptrend is underway.

  • The weekly OBV (not shown) has moved well above the early 2012 highs.

  • The downtrend on the weekly chart and first support is at $91.35 with the quarterly pivot at $89.20

  • MCD yields 3.2%.

The 3M Company (MMM) broke out of a 12-year trading range in January as it closed well above the resistance at $98.40, line e.

  • From the October 2011 lows at $68.63, the 127.2% Fibonacci target is at $105.

  • There are longer-term targets in the $120-$125 area.

  • The monthly relative performance has turned up from long-term support, line f, that goes back to 2006.

  • The RS line has moved back above its WMA.

  • The on-balance volume (OBV) is much stronger as it overcame resistance going back to 2007 in early 2012.

  • The OBV has continued to make new highs and is well above its rising WMA.

  • There is initial support now at $98.50 with stronger at $95.50-$96

  • MMM yields 2.30%.

NEXT PAGE: More Stocks with Upside Potential

Tickers Mentioned: DIA, MCD, MMM, UTX, IBM