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Strong Stocks for a Weak Dollar

May 19, 2011 10:27 AM ETMCD, UTX, DHR, RVTY
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TomAspray's Blog
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We’ve been following three technically sound stocks whose strong overseas operations will also benefit if the US dollar remains weak. One is still a good buy, and a fourth stock has just emerged.

Tuesday’s stock market decline was well supported, and Wednesday’s action suggests that the correction is likely over. Additional gains on Thursday will further stabilize that outlook and set the stage for the S&P 500 and Dow Industrials to challenge the early-May highs.

For an in-depth technical outlook on the stock market, read today’s Trading Lessons article, which will be available here this afternoon. (Sign up to receive the free eLetter.)

Crude oil and other commodity markets rebounded yesterday, and The New York Times’ somewhat bullish article on the dollar likely marks a short-term dollar top.

On April 14, I recommended three stocks that receive more than half of their revenue from overseas markets, all of which also looked positive technically.

All of the companies—United Technologies (UTX), McDonald’s (MCD), and Danaher Corporation (DHR)—did reach the recommended buying zones before turning higher.

One still looks like a good buy, as the recent correction has provided a good risk/reward entry point. I have also discovered another stock that fits the previous criteria and looks ready to move higher.

Click to Enlarge

Chart Analysis: The dollar index has retraced 38.2% of the decline from the early-2011 highs and was a bit lower on Wednesday. There is initial support now at $74.50-$75 and the former downtrend.

  • There is further chart support on the daily chart at $73.80-$74, line b, and then at $72.86, which was the recent low
  • The daily on-balance volume (OBV) made new lows on Wednesday, which is a negative sign, and the weekly OBV (not shown) confirmed the lows. It could form a positive divergence if the dollar index makes new lows over the next few weeks
  • Once above the recent highs at $76.17, there is stronger resistance at $76.90-$77.40

PerkinElmer, Inc. (PKI) is a $3 billion medical instrument and supply company that has been in a trading range of $27.57-$28.80 so far this month.

  • PKI has stronger support in the $26.60-$27.20 area with the long-term uptrend (line d) at $26.30
  • The daily OBV made new highs on Wednesday after breaking through resistance at line e in early May. There is stronger OBV support at line f
  • The weekly OBV (not shown) is acting stronger than prices with next upside targets at $29.60 and the 2008 highs

Click to Enlarge

Danaher Corporation (DHR) hit a high of $56.09 in early May, and after testing the short-term 61.8% support near $53 on Tuesday, line a, the stock closed strong on Wednesday.

  • There is stronger support at $51 and the daily uptrend, line b
  • The daily OBV is close to making new highs and does look strong with the weekly OBV also positive
  • Once above the recent highs, the next upside targets are in the $59-$60 area

McDonald’s (MCD) has also done well, as it has risen from the April 18 lows at $76.40 to close at $81.50 on Wednesday. This is a new all-time high for the stock.

  • The daily starc+ band is now just above $82 with further targets in the $83-$84 area
  • The daily OBV is leading prices on the upside and looks very strong with the weekly OBV (not shown) also confirming the price action
  • There is initial support now in the $80 area with additional support at $78.50

What It Means: The technical action in the dollar suggests that it should test—if not break below—the recent lows over the next few weeks. Though these stocks in particular would benefit from a weaker dollar, they also look strong technically and should hold up better during market corrections.

How to Profit: Don’t expect much of a pullback in PKI after Wednesday’s close. Go long at $28.14 or better with a stop at $27.38 (risk of approx. 2.7%). On a move above $29.40, raise the stop to $27.94 and sell half the position at $30.88.

From the April 14 article, buyers should be 50% long DHR from $51.88 or better, as the second buy zone at $50.64 was not hit. Those who are not long currently could buy in at $54.54 and use a stop on all longs at $52.16. On a move above $55.80, raise the stop to $53.78.

Buyers should also be 50% long MCD at $76.46, and would now raise the stop on that position from $74.77 to $78.82.

For UTX (chart not shown), buyers should be 50% long at $82.96 and 50% long at $82.34. Raise the stop from $81.88 to $85.36.

UTX did not rally with the market on Wednesday, but I think it may catch up today (Thursday). Traders can buy UTX this week only at $87.20 or better with a tight stop at $86.46. On a move above $89.40, raise the stop to breakeven.

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