Their surprising 2011 outperformance has left many big Dow stocks close to overbought conditions, but several strong performers still look to have further upside potential ahead.

The disparity in the performance of the major averages in 2011 was unusually pronounced, as the Dow Industrials gained 5.5%, while the S&P 500 was flat and the Nasdaq Composite was down 2.2% for the year.

This does not typically occur, as seen in 2010, when the Dow was up 1%, the S&P 500 gained 12.7%, and the Nasdaq Composite led the pack, up 16.8%. Plunging bond yields in 2011 were behind the Dow’s gain, as generally higher yields of Dow stocks made them more attractive buys for investors.

Given the strong performance of the Dow Industrials, it is not surprising that many of the Dow stocks were relatively close to their monthly Starc+ bands at the end of the year. I have found that the proximity of a stock’s monthly closing price to its Starc bands is one of the most reliable ways to identify overbought and oversold stocks. 

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It should be no surprise that McDonald’s Corp. (MCD) which had a stellar gain of 30.7% in 2011 is the most overbought stock, as its yearly closing price is just 3% below the monthly Starc+ band.

In contrast, the tenth stock on the list, Merck & Co. Inc. (MRK), is 10.4% below its monthly Starc+ band. The monthly analysis also reveals two stocks that could be the star performers in 2012.

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Chart Analysis: Home Depot Inc. (HD) was able to surpass its 2007 highs in 2011 and has next strong resistance at $44.26, which corresponds to the monthly Starc+ band. It is still well below the 2000 high of $70 and pays a current yield of 2.8%.

  • First support is at $41 with further support in the $39-$40 area
  • The 38.2% support from the 2011 lows is at $37
  • The relative performance, or RS analysis, overcame its long-term downtrend, line c, at the end of October. This signaled that it was outperforming the S&P 500, a trend that should continue into 2012
  • Monthly on-balance volume (OBV) is still below its long-term downtrend, line e, while the weekly OBV (not shown) is more positive

Kraft Foods Inc. (KFT) was included in last month’s list of oversold Dow stocks. It has a current yield of 3.1%.

  • KFT closed at the highs of past seven years with the monthly Starc+ band at $40.18. The stock made a high in 2002 at $43.95
  • RS analysis completed a monthly bottom formation when it surpassed the resistance at line h at the end of August
  • Monthly OBV also broke through resistance last summer (line i) and is acting very strong
  • KFT has first good support in the $36.20-$36.50 area with more important support at $34.50
  • The monthly uptrend (line g) is now at $31.50

NEXT: Latest Charts for Pfizer and Exxon Mobil

Tickers Mentioned: Tickers: HD, KFT, PFE, XOM, MCD