The rebounding stock market has finally garnered more attention as the broadly based S&P 500 closed well above the widely watched resistance at 1130 on September 20. Since the close on August 31, the S&P 500 is up 8.9% while the Dow Industrials are up 7.4%. In looking more closely at the stocks that make up the Dow Industrials, the performance was even more mixed. Since these stocks are not only widely held, but also represent a cross section of many sectors, I wanted to take a closer look at some of the stronger and weaker charts.
Table 1
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The table above looks at the percentage change in all 30 Dow components from the close on August 31, 2010 to the close on September 20. The best performer has been Caterpillar Inc. (CAT), up 15%, as it has benefited from very positive news reports over the past month, which is quite different from the tech darling Hewlett-Packard Co (HPQ). HPQ is up just 2% as it was hit hard in August following the scandal surrounding the resignation of Mark Hurd. I found some of the other results surprising as McDonalds (MCD) is up just 3% since the end of August. However, if you look at MCD from the July lows, the performance is more impressive as it is up almost 14%. Of course, one should not assume that the biggest gainers on the table have the strongest charts, because they don't.
Figure 1
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A good case in point is General Electric (GE), which the table shows is up 14%. The chart above shows that GE has some of the characteristics that are common to those stocks that have actually underperformed for the year. Below the bar chart I have included the OBV, or on-balance volume (in red), which is calculated by adding the day's volume in on the days that GE closed higher and subtracting the volume when it closed lower. A cumulative total is then kept. The green line is a 21-day weighted moving average (WMA) of the OBV. On May 6, GE violated the longer-term uptrend (line a) and the OBV dropped below its WMA. GE continued to decline for the next two months and reached the $13.75 level in July. While GE formed a higher low in August at $14.41, it is still in a broad trading range. The upper boundaries of this range are now being tested with the 50% retracement resistance of the decline from the April highs to July lows at $16.80. The OBV is on the verge of breaking above resistance at line b, but it will take some work before a new uptrend is confirmed.
Figure 2
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The daily chart of Caterpillar Inc (CAT) is much more positive as it has just broken out of its triangle formation (lines a and b). Many stocks have formed similar patterns over the past three months that could be interpreted as either continuation or top formations. As a refresher, a continuation pattern is simply a pause or interruption in either an up or downtrend. It has long been my opinion that these formations often provide the best trading opportunities. If you would like to read an earlier article on the subject, please click here. The positive action of the market internals this summer made me convinced that the months of choppy trading was just an interruption within the uptrend.
The triangle formation can also be used to determine price targets. If you measure the difference between lines a and b and then calculate the difference, you get 72.83 minus 50.27, or 22.56. This is labeled in red as line 1. If you measure up the same amount (22.56) from the breakout level of 72.03, you get a target of 22.56 plus 72.03, or 94.59. The higher highs in the OBV, line d, are also positive, and it has just moved through resistance (line c), confirming the price action.
Lesson Continues on Page 2
|pagebreak|Figure 3
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E I du Pont de Nemours (DD)-commonly known as DuPont-also has a very bullish chart. It completed a three-month continuation pattern this summer when it overcame resistance (line a) on July 23. Volume was heavy two days later (point 1) as the OBV also moved through its resistance at line d. After the breakout, DD rallied about $5 before forming another short-term continuation pattern (see circle). For those who favor Fibonacci analysis, continuation patterns often retrace approximately 50% of the prior move, and DD did hold above the 50% level before it again moved sharply higher. The bar chart and OBV both show solid uptrends (lines c and e) with good support now at $42.50. There is long-term chart resistance in the $48-$50 area.
Figure 4
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The Coca Cola Company (KO) also has a strong looking chart as after peaking in December, it moved lower for the next seven months. The daily chart shows a well-defined downward trading channel (lines a and b) that KO did not break out of it until the latter part of July. Even though the correction lasted quite a while and likely was discouraging for many investors, it did hold well above the major 50% support level at $48.70. The OBV was stronger than prices on this correction as it just made marginal new lows, line f. The OBV's move through resistance at line e was further evidence that the overall uptrend had resumed. The OBV currently looks quite strong and the price chart shows a well-defined, upward-sloping trading channel, lines c and d. In August, KO had a three-week correction that took the form of a flag (see circle). The 2009 highs are at $59.50, and currently, the upper boundaries of the trading channel are at $61.50. The high from 2008 was $65.60.
Figure 5
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Even though Boeing Co. (BA) is up only 4% since the recent lows, the daily chart of BA looks much better than most of the other lagging Dow stocks. The late-August low at $60.53 tested the trend line support that was derived by connecting the June and September 2009 highs. This represented strong resistance until it was surpassed in early 2010, but you should keep in mind that once strong resistance is overcome, it becomes support. The decline is holding well above the 38.2% support from the March 2009 lows at $58. The upper boundary of the continuation pattern, line a, is now at $67.70. If this level is overcome, the target from the triangle formation is in the $82-$84 area.
Lesson Concludes on Page 3
|pagebreak|Figure 6
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Cisco Systems (CSCO) has had a rough few months since it peaked at $27.74 at the end of April as it hit a low of $19.82 in August. This decline violated the major 50% support level, but so far, the 61.8% support at $19 has held. The daily uptrend, line a, was broken on the "flash crash" day (May 6), and while CSCO did manage to rebound back to $26.80, it again turned lower. The daily chart shows a series of lower highs and lower lows, lines b and c. The daily OBV has been diverging for the past few months, which is an encouraging sign. A move above the downtrend at $23.70 would be positive and could set up a good entry on a pullback to the $22-$22.50 area.
Figure 7
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The worst-looking stock in the Dow from a technical perspective is Exxon Mobil (XOM) even though Hewlett-Packard (HPQ) is a close second after August's heavy news-related selling. XOM presents an interesting technical picture as it topped out at $94.88 during the bear market rally in May 2008 and plunged to a low of $67.47 during the October 2008 panic selloff. During 2009, XOM failed to rally as much as the overall market, forming a continuation pattern (lines b and c) that was completed when support at line c was violated. This support, which was now resistance, was tested in April, point 1, before XOM turned lower and broke below support at line d. This resistance in the $65 area was tested in July (point 2) and now is an important level to watch with the longer-term downtrend just above this level. It would appear that this is a stock to watch as we head into in 2011.
I think these examples have demonstrated that those who invest in an index or sector fund/ETF should not ignore the performance of its individual components. It also illustrates why using technical analysis can also be a valuable tool to the intermediate-term investor.
