Overbought Dow Stocks with Good Yields

09/19/2011 10:55 am EST

Focus: STOCKS

Thomas Aspray

, Professional Trader & Analyst

These four Dow stocks offer safe, steady yields as well as solid growth potential, making any of them worthy buys on any pullback.

Stocks finished out last week surprisingly strong, and many of the strongest stocks were some that offer attractive yields. My weekend scan of the stocks in the Dow Jones Industrial Average shows that the ten most overbought stocks all have attractive yields. That is not surprising given the current uncertain investment environment and the high degree of pessimism about the stock market.

I have listed the ten stocks whose weekly close was the nearest to their weekly Starc+ bands. For example, The Coca Cola Co. (KO) closed last week at $71.23, which was just 2.6% below the weekly Starc+ band at $73.07.

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Often times the proximity to the weekly Starc + bands can provide a strong warning signal. NetFlix Inc. (NFLX) came very close to its weekly Starc+ band in July at $305 and has since dropped over 50%. NFLX closed last week below its weekly Starc- band, suggesting it is now a high-risk time to sell. The weekend announcement that NFLX is planning to split up their business may stem the stock’s slide.

Stocks are under pressure in early trading, suggesting we may see a pullback before the Federal Open Market Committee (FOMC) meeting on Wednesday. This should lower the overbought status of some of these Dow stocks.

NEXT: See Latest Charts for These 4 Dow Leaders

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Chart Analysis: The Coca Cola Co. (KO) closed last week near the three-week highs at $71.77. This stock was noted in early September as one of the few Dow stocks that was higher for the year.

  • There is first support in the $70 area with more important at $67.40-$69. There is trend line support (line a) and the weekly Starc- band in the $63.76-$64.50 area
  • The weekly relative performance, or RS analysis, moved through major resistance in July (line b) and has been in a clear uptrend since the 2010 lows
  • Volume was higher last week and the weekly on-balance volume (OBV) has turned up after testing its weighted moving average (WMA)
  • The daily OBV (not shown) is still clearly positive and is well above its rising weighted moving average

Microsoft Corp (MSFT) has rallied 14% from the August lows at $23.79 and the weekly downtrend, line d, is now at $27.75. There is additional resistance at $29.46 with the mid-2010 highs at $31.58.

  • The two-year downtrend in the RS analysis, line f, was finally overcome in July, which is an encouraging sign. The RS is now at strong resistance, so the next month or so will be important
  • The weekly OBV is still negative, and even though volume increased last week, it is still below its weighted moving average and the downtrend, line g
  • The daily OBV (not shown) is positive but still below major resistance
  • Initial support now stands at $26-$26.40 with further support at $25.20. There is key support, line e, in the $23.76-$24.25 area

NEXT: 2 More Top Performers with Safe Yields

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Procter & Gamble (PG) is a regular on most lists of “safe-haven” stocks, as it is the ultimate consumer staples company. Of the top four overbought stocks, it has the second-highest yield at 3.30%. PG closed strongly last week above the prior three-week highs.

  • There is strong resistance on the weekly chart in the $66.27-$67.80 area
  • The RS was in a well-established downtrend, line e, from June 2010 until May 2011 when the downtrend, line a, was overcome
  • The RS moved through resistance (line b) in the past month, which completes the bottom formation
  • The weekly OBV is still negative, as it is slightly below its weighted moving average and further below its downtrend, line c
  • The daily OBV (not shown) looks strong, but PG is very close to its daily Starc+ band

Intel Corp. (INTC) has rallied 14.6% from the early-September lows at $19.16. The close was at the daily Starc+ band with the weekly Starc+ band at $22.78. There is major chart resistance now in the $23.25-$24 area.

  • The RS has just overcome year-long resistance, line e, which may be a sign that INTC is finally ready to break out of its trading range
  • The weekly OBV has turned up from support at line g but is still below its weighted moving average
  • There is now a band of good support in the $20.60-$21.20 area with major support in the $19-$19.20 area, line d

What It Means: These four Dow stocks all have higher yields than the ten-year Treasury, which yields just over 2%. The yield of these stocks, plus their growth potential, makes them much more appealing, even in this difficult market.

The proximity to the weekly Starc+ bands does not favor chasing these stocks at current levels, however. Instead, wait for a pullback or at least for some consolidation before buying. The two technology stocks, MSFT and INTC, appear the most attractive.

How to Profit: For Microsoft Corp. (MSFT), buy at $25.78 with a stop at $23.42 (risk of approx. 9.1%). On a move above $28.50, raise the stop to $24.76.

For Intel Corp. (INTC), buy at $20.68 with a stop at $18.72 (risk of approx. 9.1%). On a move above $23.45, raise the stop to $19.80.

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