The 10 Most Overbought Dow Stocks

10/01/2012 9:50 am EST

Focus: STOCKS

Thomas Aspray

, Professional Trader & Analyst

A monthly look at the 30 stocks in the Dow Industrials reveals the ten that are the most overbought based on Starc+ band analysis, and MoneyShow’s Tom Aspray likes two of these stocks on a pullback to support.

Stocks bucked the historical trend in September, as the SPDR Diamond Trust (DIA) and Spyder Trust (SPY) were both up 2.4%. In late July, the relative performance analysis signaled that the Dow Industrials were starting to lag the S&P 500. Over the past two months the Spyder Trust (SPY) is up 1.2% more than the SPDR Diamond Trust (DIA).

In early September, I focused on those Dow stocks that were the closest to their Starc- bands. When a stock is closest to the monthly Starc- band, the probability is that those stocks are likely to stabilize or rally. They are considered to be oversold, and therefore are high-risk sells.

Of the stocks on the list, both International Business Machines (IBM) and Verizon (VZ) were up over 6%, and two others were up over 4%. The big loser was Intel (INTC), down over 8%, but still the average gain was almost 2%.

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Since the stock market is still in a corrective mode from the September 14 highs, I wanted to take a look at those Dow stocks that are closest to their monthly Starc+ bands, and are therefore the most overbought.

At the top of the list is Home Depot (HD), which closed just 3.4% below its monthly Starc+ band, followed by Wal-Mart (WMT), which closed the month just 5% below its Starc+ band.

Of course, the monthly analysis of relative performance and on-balance volume (OBV) can be combined with Starc band analysis to identify new opportunities.

Chart Analysis: Wal-Mart (WMT) has been trading near its monthly Starc+ band for the past three months. It closed above the band in July (see arrow).

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  • At the end of May 2012, WMT closed above the monthly resistance (line a) that went back to 2002.

  • In July, the all-time high of $70.25 was surpassed. This now becomes the initial monthly support.

  • From the April lows, the 38.2% Fibonacci retracement support is at $68.30.

  • The relative performance completed its bottom formation in May, as the resistance (line b) was overcome.

  • The OBV has been leading prices higher, as the resistance (line d) was surpassed in November 2011, and the OBV has continued to make new highs.

  • The weekly chart and technical studies (not shown) do favor a pullback.

Procter & Gamble (PG) was able to close the month above resistance (line f) and at the highest level since 2008. There is further resistance from 2007-2008 in the $73.50 to $75 area.

  • Despite the price action, the monthly technical studies are acting weaker, which makes the price action suspect.

  • Even though PG has rallied for the past three months, the RS analysis is just testing its declining WMA. It is well below its downtrend (line g).

  • The RS line has also made lower lows (line h), which is a sign of weakness.

  • The monthly OBV made new lows in June, and is well below the key resistance (line i).

  • There is first strong support now in the $67.50 to $68.50 area, with the 20-week EMA now at $66.40.

  • PG has a current yield of 3.2%.

NEXT: Which of These Telecom Names Is Stronger?

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AT&T (T) has been up for the past three years, and is up 24.7% so far in 2012. The monthly Starc+ band is at $40.39.

  • The monthly chart shows next major resistance at $40.77 to $43.12 (line a).

  • The monthly relative performance broke its long-term downtrend (line c) in June, but does show a completed long-term base formation.

  • The monthly OBV was very strong in early 2012, as it moved through long-term resistance (line e) in March.

  • The OBV has continued to act stronger than prices, but is well above its rising WMA.

  • The weekly analysis (not shown) is negative, as the RS line and OBV are both below their WMAs.

  • There is next support at $36.40 and further at $35.70. The 38.2% Fibonacci retracement support from the recent highs is at $34.24.

  • T has a current yield of 4.7%.

The other telecommunication giant, Verizon (VZ) is also on the most overbought list, but has been testing (but not overcoming) multi-year resistance (line f) over the past three months.

  • The monthly Starc+ band is now at $49.39, which is 8.4% above last Friday’s close.

  • The relative performance turned up from its WMA, but is still below the long-term downtrend (line i).

  • The OBV broke its downtrend (line k) at the end of August 2011, and moved to new highs at the end of 2011.

  • The OBV continues to look very strong, and its WMA is still rising strongly.

  • The weekly studies (not shown) are positive, but do show a loss of upside momentum.

  • There is first support now at $44 to $44.50, followed by $42.18, which was the August low.

  • There is converging support for October in the $38.70 to $40 area (lines g and h).

  • VZ has a current yield of 4.5%.

What it Means: The monthly analysis of these four stocks reveals that all except Procter & Gamble (PG) have long-term bullish outlooks. Even though PG could also still move higher, the weakness in the monthly studies do not make it a favored pick.

Both Wal-Mart (WMT) and Verizon (VZ) do look attractive for new purchases at good support, as the previous buy recommendations were not filled. All open orders from the September article on the Dow stocks should now be canceled.

How to Profit: For Wal-Mart (WMT), go 50% long at $71.64 and 50% long at $70.12, with a stop at $66.82 (risk of approx. 5.7%).

For Verizon (VZ) go 50% long at $43.70 and 50% long at $42.54, with a stop at $40.32 (risk of approx. 6.5%).

Portfolio Update: Investors should still be long AT&T (T) from $28.73, with an open profit now of over 32%. Sell one-third of the remaining position now, and use a stop at $34.48 on the remaining position.

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