The Dow’s Most Overbought Stocks
03/02/2012 10:10 am EST
Even after moving sharply higher in February, these four leading Dow stocks still have significant upside, but are close enough to monthly support to limit the risk on new positions.
Every weekend and at the end of each month, I run a series of scans that rank a group of stocks relative to their upper and lower Starc bands.
Starc band analysis is one way I determine whether a stock is in a high- or low-risk buy or sell zone. When a stock is close to its monthly Starc- band (oversold), then it is a low-risk buy and a high-risk sell.
The table above lists the ten Dow stocks that are closest to their monthly Starc+ band. Also noted on the table are the entry levels of the five stocks in the table that I have previously recommended, along with the suggested stop levels. For other positions, please see the Current Portfolio chart at the end of the column.
Home Depot (HD) closed the month at $47.57, which is just 1% below the monthly Starc+ band at $48.07. It has been near the top of the list of most overbought Dow stocks for the last two months. It is a good example of how a stock can be near the top of the list but still perform well.
At the end of December, HD was 5.1% below the monthly Starc + band, and was just 3% below it at the end of January. Still, HD is up 12.5% so far this year, but has not yet closed above its monthly Starc+ band, which would raise a warning flag.
This analysis can often also alert me to those stocks whose relative performance and volume analysis suggests they may be close to breaking above major resistance levels. Two of these four Dow stocks have had relatively narrow ranges over the past two months, which allows one to use stops under the monthly lows, making the risk on new positions well defined.
Chart Analysis: Walt Disney (DIS) was up 7.7% in February, and has rallied steadily after dropping below the monthly Starc- band between August and October. DIS had a high in 2011 of $44.34.
- There is major resistance going back to 2000 (line a) in the $45 area. A breakout above this level will have long-term significance
- The initial upside targets are in the $50 area
- The relative performance, or RS analysis, moved above its WMA at the end of January, and shows a long-term uptrend, line b
- The on-balance-volume (OBV) was very strong in 2011, and has made higher highs since 2004
- The OBV is now above its WMA and the weekly OBV (not shown) is also positive
- Initial support now at $40.80-$41.80, with stronger levels at $39-$39.50
Coca-Cola (KO) has traded in a about a $5 range for the past three months. It has been testing the breakout level, line d, that corresponds to the January 2008 high. It currently yields 2.4%.
- The next resistance is in the $75-$77 area, with the all time high from 1998 at $88.94
- The RS line has dropped back below its WMA, and is now testing its long-term uptrend, line f
- The monthly OBV broke its downtrend, line g, in 2010. It is acting much stronger than prices
- There is initial support now at $68.30-$69, with more important levels in the $66.50-$67 area
Procter & Gamble (PG) has also been trading in a narrow range of about $7 for the past five months. It closed February above the January highs, and right at resistance at line a. It currently yields 3.1%.
- Next monthly resistance stands at $71.50-$73, with the 2007 highs to follow at $75.18
- The RS line has turned up from support, line c, and a move above its WMA next month would be positive
- The RS line has long-term resistance at line b
- The monthly OBV has moved above its WMA, and shows a bullish formation (see circle)
- The weekly chart could form a doji this week, which would be a sign of indecision and allow for a short-term pullback
- There is support initially at $65.40-$66 with stronger levels in the $64.50 area
- The RS line has dropped back to its rising WMA and a move above resistance at line e, would be a very positive sign
- The OBV tested support, line f, in September and has just closed above its WMA. Higher volume in March along with higher prices would turn the OBV very positive
- The weekly OBV (not shown) is still below its WMA
- There is initial support at $84-$85.50 with stronger in the $80-$81.50 area
What it Means: Though the overall stock market is overdue for a correction, these four stocks have monthly technical patterns that suggest they have a good chance of being the new market leaders in the coming months.
How to Profit: For Walt Disney (DIS), go 50% long at $39.64 and 50% long at $38.40, with a stop at $36.82 (risk of approx. 5.6%).
For Coca-Cola (KO), go 50% long at $68.90 and 50% long at $67.84, with a stop at $64.44 (risk of approx. 5.7%).
For Procter & Gamble (PG), go 50% long at $66.06 and 50% long at $65.44, with a stop at $63.20 (risk of approx. 3.9%).
For Exxon Mobil (XOM), go 50% long at $85.90 and 50% long at $84.68, with a stop at $81.62 (risk of approx. 4.3%).