The monthly review of the stocks in the Dow Jones Industrials reveals which ones are the most oversold but Moneyshow’s Tom Aspray cautions investors to be cautious about their entry level as they are likely to become more oversold before they bottom.
The stock market’s decline last Friday reversed many of the positive readings from the prior day’s strong close. The market internals are still locked in their month-long trading range but the downward pressure on the stock market seems to be growing as we head into the Election Day.
The past month has been especially hard for the some of the large cap, high yielding Dow stocks. The SPDR Diamond Trust (DIA) in October lost more than 1% more than the Spyder Trust (SPY). Of course concerns over a potential hike in the tax rate on dividends has clearly been a factor that has depressed many of these stocks.
Therefore, I found the results of my monthly scan of the 30 Dow stocks quite interesting. As a quick reminder this scan looks at where the 30 stocks that make up the Dow Industrials closed October in relation to their starc bands.
This has been a regular monthly feature for over a year. If a stock closed near its upper starc band (starc+) it is considered to be a risk buy and overbought. Conversely, closeness to the lower starc band (starc-) indicates that a stock is a high risk sell or oversold.
Of course that does not mean that an overbought stock can’t go higher or an oversold stock can’t go lower. Therefore, once I have the scan results I look at how the stocks are performing versus the S&P 500 and also their monthly volume patterns.
The table shows that The Coca Cola Co (KO) is at the top of the list as it is 9.4% above its starc- band. The surprise with this month’s analysis is that a close technical review of the 10 most oversold Dow stocks suggests that almost all look as though they can still go lower in November.
Many of stocks on the list are being recommended by analysts because of their long-term growth potential but an entry level or stop is generally not given. The analysis of these four Dow stocks suggests that now is not the time to be doing aggressive new buying in spite of their attractive yields or long-term growth potential.
Chart Analysis: Coca Cola Co (KO) peaked in early August at $40.67 and is now 8.8% below this high. The close in October was the lowest in four months with the 20-month EMA at $35.55.
- The monthly uptrend, line a, is at $34.81 with the monthly starc- band at $33.69
- The monthly relative performance or RS analysis did form lower highs in August, line b, and has dropped below its WMA.
- The RS line is now at more important support, line c, and a drop below the February lows would be more negative.
- The monthly OBV did make new highs in September and is well above its WMA.
- The weekly OBV (not shown) is negative as it is below its declining WMA
- There is initial resistance now in the $38-$38.80 area
McDonald’s Corporation (MCD) was at the top of the August monthly oversold list but dropped to third this month. The close in October was below the monthly uptrend, line d.
- In January, MCD peaked at $102.22 and MCD is now down 15% from the highs. The monthly reversal evident on the monthly chart suggests MCD could decline for a couple of more months.
- There is next good support in the $84.40 to $83.73 area with the major 38.2% Fibonacci retracement support from the 2008 low at $80.79.
- The monthly starc- band is at $78.07 with the 50% retracement support at $74.07.
- The monthly RS line has been below its WMA since the end of April and has next important support at line e.
- The weekly RS analysis (not shown) topped out early in 2012 and is still well below its WMA with no signs yet of a bottom.
- The monthly OBV rallied from major support, line f, in June but now appears to have rolled over as it has closed back below its WMA.
- The weekly OBV (not shown) is now testing its longer term uptrend.
- There is first resistance at $89 with gap resistance at $90.25 to $92.61.
The monthly chart of International Business Machines (IBM) shows a potential double top formation (points 1 and 2) with key support now at $181.85, which was the July low.
- The monthly candle formation (see arrow) does suggest that IBM will move lower in November.
- There is further support in the $177 area with the monthly starc- band at $169.08
- The major 38.2% Fibonacci retracement support is at $157.41.
- The monthly relative performance violated long term support, line a, in August and has now turned lower after testing its flat WMA.
- The monthly OBV is holding above its WMA and has long term support at line b.
- The weekly OBV is still holding in its trading range and is holding above key support.
- For IBM there is first resistance now at $198-$200 with stronger above $204.
The monthly chart of E. I. du Pont de Nemours and Co. (DD) shows that it closed below the uptrend, line d, that goes back to the 2008 lows. This combined with the lower highs on the monthly chart, line c, makes more selling likely.
- The close below the July low of $46.15 is also a sign of weakness with next monthly support at $43.05.
- The major 38.2% Fibonacci support is at $41.31 with the monthly starc- band at $38.32
- The monthly relative performance dropped below its WMA in August 2011 and has stayed below its flat WMA.
- The key relative performance support at line e was broken in September and the RS line is now dropping sharply.
- The monthly OBV held up better as it has not dropped below its WMA and has major support at line f.
- The weekly OBV (not shown) is in a clear downtrend and is below its WMA.
What it Means: The monthly analysis of these four stocks suggests they may not bottom for another month or two. Both IBM and DD are now trading very close to the weekly starc- band so they could stabilize or bounce over the next few weeks before the selling returns.
Often the monthly oversold analysis can alert investors to good buying opportunities as the stocks test important monthly support. One stock that fits this criterion is Intel Corp. (INTC), which I recommended last week.
The other stock on the list I am watching is Johnson & Johnson (JNJ) as it made new all-time closing highs last month, and it will look attractive on a pullback.
How to Profit: No new recommendation and all orders from last month’s article should be cancelled.