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Tom Aspray, professional trader and analyst was originally trained as a biochemist but began using his computer expertise to analyze the financial markets in the early 1980s. Mr. Aspray has written widely on technical analysis and has given over 60 presentations around the world. Many of the... More
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  • 5 Stocks Buffett Would Love  0 comments
    Mar 12, 2011 7:46 AM | about stocks: ITW, GWW, ADP, KMT, EXPD

    5 Stocks Buffett Would Love  These companies are fundamentally strong, and the charts show solid long-term uptrends. With corrections underway, each stock looks like an attractive buy for value-minded investors and traders.

    In a recent Wall Street Journal article, Dennis K. Berman discusses the results of a scan conducted by CapitalIQ to find stocks that appeared to meet Warren Buffett's acquisition criteria.

    Though it is quite likely that Mr. Buffett will not buy any of these companies, the fact that they fit the criteria warrants a closer technical appraisal to see if they would work together as a "Buffett-style" portfolio.

    Figure 1


    Click to Enlarge

    Starting out, it might be illuminating to take a look at the chart of Burlington Northern (BNI) up to the time of Buffett’s buyout in 2009. This chart is courtesy of QuoteMedia.com since my historical database only went up through 2006. There are just a few things that need to be pointed out. The first is the basing period from roughly 2001 through 2004 as BNI finally overcame resistance (line a) at $33.40 in July 2004. BNI shows a clear pattern of higher highs and higher lows up through the peak in June 2008 at $114. The final peak occurred after BNI broke out of its upward trading channel, lines c and d. The drop back through this support (line d) in December 2008 suggested a change in trend as it violated the lows made early in the year. Before the decline was over in March 2009, the long-term uptrend, line b, was also briefly violated. By looking at this chart, it is evident that BNI was a strong market performer for many years as Buffett was accumulating shares, but it also shows that long-term bulls might have bailed out of BNI when the $80 level was broken.

    Figure 2


    Click to Enlarge

    The first stock I would like to examine is Illinois Tool Works (ITW), which has long been a darling of many astute value investors and advisors. ITW bottomed in March 2009 at $25.60 (point 1), and by the end of the year, it had almost doubled (point 2).  In April 2010, ITW hit a high of $52.49 and then underwent a several-month correction that held above the major 50% support level at $39. During the correction to the August 2010 low of $40.33, the on-balance volume (OBV) held up very well and had confirmed the April highs. The longer-term uptrend in the OBV, line f, was tested on several occasions. The OBV moved through its resistance (line e) the week of September 18, 2010, signaling that the uptrend had resumed.
    ITW is now in a solid uptrend, line c, and is testing the major resistance, line a, in the $56 area, which goes back to 2008. Once this is overcome, the all-time highs are at $60. Using the impulsive rally from point 1 to point 2 and measuring up an equal amount from point 3, the 100% target is just above $66. This corresponds nicely with the upper boundaries of the long-term trading channel, line b. The OBV has pulled back to its weighted moving average (WMA) but does show a pattern of higher highs.

    How to Profit: Buy ITW at $53.65-$54.35 with a stop at $50.27 (risk of approx. 7.5%). On a move above $56.65, raise the stop to $53.90 and sell half the position at $59.88.

    Figure 3


    Click to Enlarge

    WW Grainger (GWW) is a Chicago-based industrial equipment company that formed a double bottom in March 2010 at just below $60 per share. The OBV made new lows with prices and formed no positive divergences. The major resistance in the OBV, line d, was finally surpassed in August 2009, which was bullish. By Thanksgiving 2009, the all-time highs from 2007 at $99.60 were surpassed. The correction from the April 2010 highs at $116.07 was fairly brief as it held well above the 38.2% support at $95. The weekly OBV turned up in July and made new highs in August, leading prices higher for almost a month.

    Since December, GWW has been consolidating from the highs at $140.17 and shows a flag formation on the weekly chart, lines a and b. The insert shows the same formation on the daily chart, which is clearly a continuation pattern. The short-term targets from this formation are in the $148-$150 area. The equality target, using the rally from point 1 to point 2 and measuring up from point 3, is at $153.

    How to Profit: The flag formation clearly favors an upside breakout and the only question is how close we are to completing the pattern. I would buy GWW at $132.60-$133.88 with a stop at $127.86 (risk of approx. 4.4%). If we complete the flag formation first by closing above $138.15, then buy at $137.47 or better with a stop at $132.77 (risk of approx. 3.4%).

    To read the rest of the article, please click here

    For further reading on on-balance-volume "What Traders Need to Know About the OBV"

    Stocks: ITW, GWW, ADP, KMT, EXPD
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