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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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  • The S&P 500's Most Overbought Stocks 0 comments
    Dec 12, 2011 12:35 PM | about stocks: BMY, GIS, VZ, MO, GLD

    Even after a strong two-week rally, these standout S&P 500 stocks have yet to reach extreme overbought levels and are likely to outperform the broad market in the event of a pullback.

    With the S&P 500 up over 8% in the past two weeks, it is important to know which stocks in the index are overbought and whether any are still oversold. The most objective way I have found to measure this is by comparing the weekly or monthly closing price to the Starc band readings.

    Over the years, I have found that buying a stock when it is above its weekly Starc+ band is generally a mistake. More often, if I am fortunate to be long a stock that moves above its weekly Starc+ band, it’s best to take some profits.

    As noted in “Red Flags Preceded Gold’s Drop” the SPDR Gold Trust (GLD) stayed above its Starc+ band for several weeks before it dropped sharply.

    Click to Enlarge

    In all of the S&P 500, Bristol-Myers Squibb Co. (BMY) is the most overbought, but as the table indicates, it is still 3% below its weekly Starc+ band. All of the ten most overbought stocks are well-known names, and you will note that there is a high concentration of consumer staples stocks included.

    The four stocks I have selected from the list have the most positive relative performance, or RS analysis patterns. This means that they are performing better than the S&P 500 and are likely to drop less severely than the overall market during one of the all-too-frequent sharp market corrections we’ve been experiencing. Each of the four stocks also pays attractive yields.

    Click to Enlarge

    Chart Analysis: Bristol-Myers Squibb Co. (BMY) dropped sharply the week ending November 25 after testing major weekly support, line a, in the $30 area before rallying sharply.

    • BMY has already surpassed the late-October highs, which clearly indentifies it as a market leader

    • The major 38.2% retracement resistance calculated from the 1999 high of $75.37 is at $38.50

    • RS analysis turned positive in the spring of 2011 and is in a well-established uptrend, line c

    • On-balance volume (OBV) also looks very strong as it overcame long-term resistance at line d in September

    • There is initial support now at $32-$32.75 with the weekly uptrend, line b, at $31

    General Mills Inc. (GIS) is a $26 billion company whose shares closed right on major trend line resistance (line e) at $40.43. This resistance goes back to early 2010.

    • The trading range (lines e and f) is $5.60 wide, giving an upside target in the $46 area

    • RS analysis completed its bottom formation in August while the market was under pressure

    • Weekly OBV broke out through long-term resistance (line h) in September, just two weeks before the market bottomed in early October

    • Weekly OBV has long-term support at line I, while the daily OBV (not shown) looks very strong

    • There is first support at $40 with further support at $39-$39.40

    Click to Enlarge

    Verizon Communications (VZ) closed above several-month resistance, line a, two weeks ago, and added to the gains this past week. There is further resistance at $38.95, which was the April 2011 high.

    • VZ hit a high of $43.02 in October 2007 and has major 61.8% Fibonacci retracement resistance at $47

    • The downtrend in the weekly RS analysis was broken in the middle of 2009, and the stock has been in a strong uptrend since (line d)

    • Weekly OBV did confirm the April highs but is currently lagging the price action. It is slightly above its weighted moving average (WMA) and has held support at line e

    • VZ dropped as low as $32.28 in August when the long-term support at line b was tested. The decline held well above the major 50% retracement support at $31.86

    • There is first good support now at $36.50-$37.50

    Altria Group Inc. (MO) shows a similar breakout as Verizon, having closed well above the weekly resistance at $28.20. There is first good support now at $26.80-$27.30.

    • The long-term uptrend, line g, was slightly broken in August, though not on a closing basis

    • RS analysis continues to look strong, showing a pattern of higher highs. Initial support stands at line h with longer-term support at line i

    • Volume was quite strong last week and has moved well above its flat WMA. So far, the OBV has not yet confirmed the breakout

    • Upside targets from the chart are in the $31-$32 area

    What It Means: It is a positive sign for the market that after such a good two-week run, stocks are not more overbought as measured by the weekly Starc+ band analysis. It should also be pointed out that the strong weekly RS analysis on all four stocks makes them well worth watching.

    How to Profit: General Mills Inc. (GIS) is the only one of the four stocks that currently looks attractive for new positions. Go 50% long at $40.06 and 50% long at $39.72 with a stop at $37.18 (risk of approx. 6.8%).

    Stocks: BMY, GIS, VZ, MO, GLD
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