The Lowdown on Two Big Chips

02/02/2007 12:00 am EST


Jocelynn Drake

Financial Analyst, Schaeffer's Investment Research

Schaeffer's trading expert Jocelynn Drake takes a look at the large-cap stocks, from a technical point of view. Here, she finds two worth watching--one for the downside and one for a possible rally...

"3M Company's (MMM NYSE) fourth-quarter net income soared 58% to $1.18 billion, or $1.57 per share and sales jumped 9% to $5.78 billion. Excluding items, earnings came in at $1.10 per share, compared to estimates of $1.14 on sales of $5.76 billion. 3M expects 2007 earnings between $4.60 and $4.75 per share (on an adjusted basis) compared to estimates of $4.99 per share. The stock gapped lower on the open, falling through former support at the 77 level. It managed to reclaim support at the 75 level, representing a 50% retracement of the stock's rally from its August low of $68.18 to its November high of $81.95. However, MMM's attempts to climb have been hindered by its 160-day moving average at the 76 level.

"From a longer-term perspective, the shares could be in a bit of trouble. The stock has created a series of lower highs since hitting its June 2004 high, indicating its strength is waiting. It could be due for another pullback to support at its ascending 80-month moving average at the 68 level.

"Colgate-Palmolive (CL NYSE) boasted fourth-quarter earnings of $401.2 million, or 73 cents per share. Excluding items, earnings came in at $436.9 million, or 80 cents per share, as sales increased to $3.21 billion. Analysts had predicted earnings of 77 cents per share on sales of $3.12 billion. Yet, investors were not impressed. The stock fell into the red on the open, but bounced off support at the 66 level, marking a high in the shares in January 2000 and December 2000. However, this rally has been cut short by resistance at the 67 level, which has capped the shares on a daily closing basis since late November. It is an understatement to report that the stock is stuck in a narrow trading range.

"It is encouraging to see that the stock has been in a strong uptrend since mid-May 2005, using the occasional support of its rising 10-week and 20-week moving averages. After brief consolidation under the 67 level, it could continue its uptrend. From a sentiment perspective, it appears that options players are relatively optimistic. The stock's Schaeffer's put/call open interest ratio rests at 0.71 in the 10 percentile. However, out-of-the-money call open interest is extremely light, indicating that investors don't expect the shares to run much higher. A break through resistance at the 67 level matched with these low expectations could help fuel the next leg of the stock's rally."

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