The Most Overbought Dow Stocks

01/03/2014 11:00 am EST


Thomas Aspray

, Professional Trader & Analyst

Despite the fact that they are currently overbought, once these market leading stocks start to correct, they should prove to be attractive new buys, writes MoneyShow’s Tom Aspray.

The stock market started off the New Year on the downside for the first time since 2008. But still, the Spyder Trust (SPY) is just 1% below the recent highs. The declining issues outweighed the advancing ones by over a two-to-one margin, which has dropped the McClellan oscillator to +58 on the close. The oscillator did form a slight negative divergence at Tuesday’s highs.

The futures are higher before the opening, and it would take several consecutive down days to suggest that a deeper correction was underway. The important support for the S&P 500 (SPX) is in the 1,800-1,810 area.

As I noted yesterday, in my technical market review, the bullish sentiment is quite high, with the number of bearish financial newsletter writers close to a 26-year low. It will take a more severe decline before these numbers start to turn around.

With 83% of the stocks in the Dow Industrial now above their 50-day MAs, the Dow is clearly in overbought territory, but below the recent high at 90%. At the correction lows in August and September, less that 20% were above their 50-day MAs. Those types of readings create a more favorable risk-buying opportunity.

Therefore, when I ran my monthly starc band scan of the thirty Dow Industrial stocks on New Year’s day, I was not surprised to find quite a few stocks near their starc+ bands.  When a stock or ETF is close to this band it is considered to be a high-risk buy, since 93% of the price activity should stay within these bands. The SPDR Dow Industrials (DIA) closed last month 3.5% below its monthly starc+ band.

However, these overbought stocks are also typically market leaders and therefore should be attractive for new purchase once they either correct, or trade in a range where the risk can be better controlled.

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Leading the list this month is 3M Company (MMM), which was a pick from September’s most overbought list. It closed the month on its monthly starc+ band, as it has moved sharply higher in the last quarter of the year. Three of the other stocks on the list show positive relative performance analysis, suggesting they should continue to lead the market higher in 2014.

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Chart Analysis: 3M Company (MMM) has a one-year performance of 48.4%, as it was up 16.4% in the past three months.

  • The monthly projected pivot resistance for January is at $150.56.

  • There is initial support now at $134, and then at $132.25, which is the quarterly pivot.

  • There is major chart support in the $125-126.40 area.

  • The monthly relative performance moved through its two-year downtrend (line b) and its WMA at the end of 2012.

  • The RS line is still rising strongly and is well above its WMA.

  • The weekly RS analysis (not shown) did confirm the new highs.

  • The monthly OBV also looks quite strong, as December’s volume was the highest of 2013.

  • The weekly OBV did not make a new high, which sets up a potential negative divergence in the coming months.

Walt Disney Co. (DIS) is a stock that I have liked for most of 2013, though my buying attempts have been unsuccessful.

  • DIS was up 50.9% in the past year and had a stellar 18.9% gain in the past three months.

  • The monthly chart shows that DIS surged above its monthly starc+ band in May.

  • The stock moved sideways for the next four months, before finishing the year strong. This is typical behavior when the bands are exceeded.

  • For January, the monthly projected pivot resistance is at $81.65.

  • The relative performance turned sharply higher in December, as it staged an upside breakout, line e, in 2012.

  • The monthly on-balance volume (OBV) has also made new highs, and it also broke out to the upside in 2012 (line f).

  • The monthly OBV is well above its rising WMA, but is a bit overextended.

  • The weekly RS and OBV analysis (not shown) both confirmed the recent highs.

  • There is initial support now at $74-$74.60, with the quarterly pivot at $72.01.

NEXT PAGE: 2 More Overbought Stocks to Watch


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Coca-Cola Co. (KO) is up just 11.1% in the past year, but was 9.4% higher in the past three months. It is part of the consumer staples sector, which has been underperforming the S&P 500 all year.

  • The monthly chart shows that KO had a low of $36.57 in October, which was very close to major support at line a.

  • The May high was $42.52, with the monthly projected pivot resistance for January at $43.04.

  • The relative performance has been below its monthly WMA since August 2012, after forming a negative divergence, line b, at the May 2013 high.

  • The RS line has reached more important support at line c, and the weekly (not shown) shows a potential bottom formation.

  • The monthly OBV has been above its WMA since October 2010, and made a new high in December.

  • The OBV retested its WMA in September, which was a bullish setup.

  • The weekly OBV is also well above its WMA, and is testing the highs from 2012.

  • The first quarter pivot is at $39.76, with the December low at $38.87.

United Technologies (UTX) has gradually edged higher for the past six months after breaking through resistance at line e.

  • UTX was up 36.5% in the past year, with a three month gain of 7.7%.

  • The monthly projected pivot resistance is at $119.25, with the monthly starc+ band at $122.10.

  • The relative performance moved through its resistance in June 2013 (line f), after testing its uptrend, line g.

  • The weekly RS line (not shown) peaked in September and is currently well below these highs.

  • The monthly OBV has been above its WMA since last January, but has been in a tight range.

  • The OBV is still well below the highs from 2011.

  • The weekly OBV (not shown) did make new highs for the year last week.

  • There is first support now at $111.20-$112, with the quarterly pivot at $109.80.

What it Means: The monthly analysis does confirm the market leadership of 3M Company (MMM) and Walt Disney Co. (DIS). Previously recommended MMM and will need to see either a pullback or consolidation before buying DIS.

The volume analysis of Coca-Cola Co. (KO) looks quite strong and a drop back towards the 20-month EMA should be well supported.

Still holding long positions in United Technologies (UTX) and will look to add if we get a setback.

How to Profit: For Coca-Cola Co. (KO), go 50% long at $39.78, and 50% long at $38.44, with a stop at $37.74 (risk of approx. 3.5%).

Portfolio Update: Still 50% long 3M Company (MMM) from $117.74, as sold half a bit early at $128.41. Use a stop now at $123.82.

Should be 50% long United Technologies (UTX) from $105.44, with a stop now at $105.44.

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