The performance of the stock market in the first quarter of 2018 left many investors and traders nervous if not disillusioned. This is especially true of those who just moved into the stock market in late 2017 or early 2018.
In last weekend’s article, “The Week Ahead: the Good and Bad News For Investors,” I discussed my view that the trading ranges that have developed since the January highs are just continuation patterns or pauses in the major trend.
The daily charts reflect the wide swings both up and down over the past two months, which is why I have always recommended that the monthly and weekly charts should receive more attention. Each month, I look at where the 30 Dow stocks closed the month in relation to their starc bands.
When a stock or ETF closes near its upper starc band (starc+), it is considered to be a high-risk buy and therefore overbought. Conversely, a close near the lower starc band (starc-) indicates that a stock is a high-risk sell area and is oversold.
These bands were developed by Manning Stoller to identify price extremes and when either monthly band is reached then a move in the other direction is expected. Therefore, when a positive signal is observed near the starc- band the risk/reward is generally more favorable.
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 analyze their monthly volume patterns. The five most oversold stocks based on the starc band analysis at the end of April are listed in this table.
In the April 30 scan, Proctor & Gamble (PG) was the most oversold as it closed at $72.11 which was 1.8% below its monthly starc- band at $73.43 (point 1). The major Fibonacci 61.8% support from the 2015 low of $59.49 to the 2017 high at $92.40 was at $72.06, line a. The low in April was $71.95. The next major support is at the early 2016 low of $68.75.
The monthly relative performance (RS) measures the performance of PG against the S&P 500 and it has been declining since 2014. This confirms that it has not been a market leader for the past five years. The RS tested the declining 21 WMA twice in early 2017 (see arrows) before it plunged. This occurred when PG was making its 2017 high of $92.40.
The OBV dropped below its WMA in early 2018 which supported the weakness in the RS analysis. The declining 20-month EMA at $82.24 is now significant resistance. The monthly downtrend in both price and the RS is negative for PG but an oversold bounce is becoming more likely.
The other four stocks on the table do look better technically than PG. MMM Company (MMM) closed April at $194.39 which was just below the monthly starc- band but between the 38.2% and 50% support levels. The 50% support at $192.09 could be reached with just one sharp down day. If it holds this level could be used to determine your stop.
Even though the RS line is also below its WMA it did make a new high in November 2017. Typically before a major top, the RS will form a negative divergence. The monthly on-balance-volume (OBV) just dropped below its WMA in April and could flip back to positive with a higher close in May. It is still above the support at line b.
The Coca-Cola Company (KO) was only slightly lower in April as the month’s low of $41.90 was slightly above the February low of $41.82. It is also an encouraging sign that the support connecting the 2015 and 2016 lows, line a, has been reached and appears to be holding.
KO stock formed a doji in April as the open and closing price were about the same. This is typically a sign of indecision and a close in May above the doji high at $45.03 will trigger a monthly doji buy signal. The April close was just over 10% below the January high at $48.19 with the monthly starc+ band at $49.11.
The weekly RS is still well below its WMA and the downtrend, line b. This indicates that it is currently not ready to outperform the S&P 500. The trend in the OBV is very strong as despite the pullback over the past three months it has stayed well above its rising WMA. The long term support, line c, is well below current levels.
United Technologies Corp (UTX) had a high in January of $138.37 and had a low of $119.37 in April which was a decline of 13.7% from the high. The pullback looks fairly minor on the monthly chart but probably was deep enough to cause some long-term investors to sell. The correction has held so far above the 20 month EMA at $117.63. The 38.2% retracement support of the rally from the 2016 low of $78.91 is at $115.74. The November 2017 low was $115.25 which coincides nicely with the 38.2% support.
The RS has been in a range for the past two years and I would be watching for a move above its WMA later this year. Then the RS would need to overcome the downtrend, line a, to signal that it is a market leader. The OBV made a significant new high with the stock price in January and has just crossed below its WMA. The OBV is still well above the multi-year support at line b.
DowDupont (DWDP) is a $147 billion company and is a 21% holding of the Materials Sector Select ETF (XLB). The April low was $61.27 which was down 20% from the January high at $76.68. The 38.2% Fibonacci support is at $60.66 while the May 2017 low at $58.67 is an additional level of support.
DWDP also formed a doji in April so a May close above $68.36 will trigger a monthly doji buy signal. The first target is the $75.61-76.68 area and then the monthly starc+ band at $80.06. The monthly RS peaked last October and has dropped back below its WMA. It is still well above the support from 2013 at line a. The OBV has just dropped below its rising WMA. A violation of the previous low, line b, would indicate that the decline can go further.
What does it mean? The monthly analysis of these four stocks suggests they may could be close to ending their corrections. The two most interesting, in my opinion, are United Technologies Corp (UTX) and DowDupont (DWDP).
This is based on the positive longer-term trend in the OBV and the fact that the correction in both stocks has taken them to strong support that could be used to control the risk. Both now require a shift in the daily and more importantly the weekly technical studies to suggest that the worst of the selling is over. Specifically, I would look for the weekly OBV to move above its 21 period WMA. Stay tuned via Twitter.
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