A proven technical tool indicates that widespread recent selling has driven many Dow stocks to levels where good buying opportunities may soon emerge.

The selling continued on Monday with all the major averages closing lower. The Dow Industrials held up the best, only losing 0.5%, while the S&P 500 was down 1.08% and the KBW Bank Index was down by more than 2%.

The market internals were solidly negative with declining stocks swamping the advancing issues by almost four to one. The number of stocks making new lows also picked up, but it is still well below the levels seen last summer.

The McClellan Oscillator has dropped to -177, which is getting oversold, although it hit a low of -268 in March.

There are many ways to gauge whether an individual stock is overbought or oversold.

Last week’s article, “Gain an Edge with Volatility Analysis,” prompted quite a bit of interest in the Starc bands, and therefore, I wanted to take a look at the stocks in the Dow Industrials to find those that were the most oversold in terms of their weekly and daily Starc bands.

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Chart Analysis: Home Depot (HD) was down almost 1% on Monday to close at $34.29, not far above the weekly Starc- band, which stands at $33.77. The weekly uptrend, line a, was tested last Friday.

  • HD has additional weekly support from last fall in the $32 area
  • For the past three days, HD has closed at the daily Starc- band, increasing the odds of a bounce in the next few days
  • There is initial resistance at $35.50, line c, with the daily Starc+ band at $36.46. The former daily uptrend (line b) is at $36.98

Financial stocks have been leading the market on the downside, and Bank of America (BAC) closed Monday not far above weekly Starc- band at $10.36. BAC reached the 50% retracement resistance and the weekly Starc+ band in January (point 1). The relative performance, or RS analysis, deteriorated by March (see “Big Banks Flunk Smell Test”) and the technical outlook for BAC has stayed negative.

  • The weekly chart also has trend line support, line d, in the $10.36 area
  • BAC closed Monday on the daily Starc- bands. In February (point 2), the stock tested the Starc- band for three days before bouncing by almost a dollar
  • In April (point 3), BAC tested the Starc- band for two days then moved sideways for two weeks before resuming its decline
  • The daily Starc+ band is at $11.92 with strong trend line resistance (line e) in the $12.35 area

NEXT: More Oversold Dow Stocks; How to Profit

Tickers Mentioned: Tickers: HD, BAC, JPM, GE