The 3 Weakest Dow Stocks

07/23/2012 11:16 am EST


Thomas Aspray

, Professional Trader & Analyst

The short-term weakness in the market internals and the Dow Transportation Average last week warned of a correction, and these three Dow stocks look especially vulnerable, writes MoneyShow’s Tom Aspray.

The failure of the market internals like the Advance/Decline line to make new highs last week was a sign of weakness, and set the stage for overseas selling early Monday. The 2% drop in the Hang Seng Index has been followed by declines in the Eurozone stock markets as the debt focus returned to Spain on Friday. The S&P 500 was down more than 20 points in early trading.

The focus this week will still be on earnings, with Apple (AAPL) out on Tuesday and Dow heavyweight Caterpillar (CAT) out on Wednesday. As I noted last Friday, “Even Good Earnings Can't Stop a Correction,” and while better than expected earnings from a market bellwether like AAPL could help support the tech sector, it is unlikely to prop up the entire market.

The 2.3% drop in the Dow Jones Transportation Average last week is also a concern, as the Transports have started a divergence from the Dow Jones Industrials. In June, the Transports confirmed the action in the Dow Jones Industrials signaling a further rally.

Within the Dow Industrials, three stocks look especially vulnerable, and one reports earnings on Wednesday.

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Chart Analysis: The daily close chart of the Dow Jones Industrial Average shows that it made higher closing highs last week (line a).

  • In contrast, the Dow Transportation Average formed lower highs (line c).

  • On Friday, the Transports closed at 5,072, which was just below the previous low close of 5,078.

  • The Dow Industrials still show a pattern of higher lows (line b), with key closing support now at 12,573.

  • There is more important closing support for the Transports at 4,985, which was the close on June 25.

Alcoa (AA) was featured on July 9, before its earnings came out. The weekly analysis at the time suggested that the earnings would not be a positive for its stock price.

  • The daily chart shows a 2 1/2-month trading range (lines a and b). A decisive close below support projects a decline to the $7 to $7.30 area.

  • The daily relative performance, or RS analysis has formed lower highs (line f) and lower lows (line g). This indicates that it has been weaker than the S&P 500.

  • The weekly relative performance (not shown) has formed lower lows throughout 2012.

  • The daily on-balance volume (OBV) broke its support (line h) on July 12, which suggests that prices will follow.

  • There is initial resistance now at $8.50, with stronger levels above $8.80.

NEXT: 2 More Black-and-Blue Chips |pagebreak|

Click to Enlarge

American Express (AXP) beat analysts’ expectations last week, but the 7% increase in credit-card spending was not enough for investors, as it dropped 3.6% last week. The daily chart shows that the selling was especially heavy on Thursday.

  • The daily chart has support next at $54.50, then $54, with the early June low to follow at $53.18.

  • The daily relative performance has dropped below support (line b), suggesting that it is no longer leading the S&P 500.

  • The weekly RS line has also dropped below its WMA.

  • The daily OBV formed lower highs last week (line c), and then violated support (line d) last Thursday.

  • The weekly OBV (not shown) is still holding above its WMA.

  • There is initial resistance in the $57.50 to $58 area.

Caterpillar (CAT) has been in a steady slide from its February high of $116.95. With Friday’s close at $80.85, it is down 30.8% from the highs. The company has been at odds with its unions for some time, which has not helped the stock price.

  • The weekly chart shows that the uptrend going back to the 2010 low (line e) was broken on a closing basis last week.

  • There is a band of weekly chart support now in the $73 to $68 area.

  • The weekly relative performance turned negative in early April (line 1) as it dropped below its WMA and the uptrend (line f).

  • The longer-term support (line g) has now been broken.

  • The RS analysis turned positive for CAT in early 2010, and stayed positive until the early 2011 highs, catching the rally from $55 to $116.

  • The weekly OBV turned negative in April, as it dropped below its WMA and the uptrend (line h).

  • The longer-term OBV support (line i) was slightly broken last week.

  • There is initial resistance now at $83.40, with further levels in the $85.30 to $87.50 area.

What it Means: Stocks have opened sharply lower Monday, so it will be important to see how well the selling is absorbed by the market. It will also be important to watch the daily closes in the Dow Jones Industrials this week, as the 12,572 level could be challenged.

For more on why the interaction of the Dow Industrials and Dow Transports is so important, please read “80-Year-Old Wisdom That Still Works.”

The outlook for American Express (AXP) has turned more negative and longs should now be closed out. Even though Caterpillar (CAT) has been under heavy selling pressure for some time, a further drop to stronger support can not be ruled out.

How to Profit: For American Express (AXP), investors should be 50% long at $54.62 and 50% long at $53.78. The stop was raised to $54.36, which was breakeven, but I would suggest closing out longs now.

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