A proven technical measure suggests that selling pressure is likely to subside for these Dow leaders in the weeks ahead, possibly leading to some good buying opportunities.
The selling was heavy on Monday, and early Tuesday, overseas markets are also sharply lower. Clearly, there are no signs yet that the market has bottomed, though as I have noted recently, the sentiment measures are reaching levels that are more consistent with a market bottom than a market top.
Not all stocks bottom or top out together, so for those investing or trading individual stocks, a different approach is needed than if you are trading a market-tracking ETF like the Spyder Trust (SPY).
Starc band analysis can be very helpful-as recently demonstrated by the gold market- in identifying high- and low-risk buy or sell zones. The table above lists the ten most oversold Dow stocks based on the proximity to their monthly Starc- band as of the end of September.
The oversold column reflects the percentage that the stock is above its monthly Starc- band. For example, Caterpillar Inc. (CAT) closed last Friday (Sept. 30) at $73.84, just 0.3% above the monthly Starc- band at $73.64. CAT was down sharply Monday to $70.55 and is now well below its monthly Starc- band.
Chart Analysis: Caterpillar Inc. (CAT) tested its monthly Starc+ band for four months early in the year, reaching its high of $116.55. With Monday's close, it is now down 39.4% from its 2011 high.
- The major 50% Fibonacci retracement support stands at $69 with the 61.8% support at $57.80
- The relative performance, or RS analysis, staged a major breakout in 2010 and overcame resistance at line a
- The pullback in the RS looks normal so far, and the long-term trend suggests CAT will continue to outperform the S&P 500
- The monthly on-balance volume (OBV) did confirm the new highs in early 2011 but has now pulled back to support at line b
- The weekly and daily OBV (not shown) are both negative. The recent selling has not been as heavy as what occurred in August
- Initial resistance is at $80 and a move above the $87-$88 level is needed to stabilize the near-term outlook
The long-term outlook for the 3M Company (MMM) is a bit less positive. The decline from the July highs at $98.19 has been quite sharp. There is a level of good support on the monthly chart, line c, in the $66.60 area with the major 61.8% support at $62.90.
- The monthly RS analysis is neutral but still above support at line d. The weekly and daily RS analysis (not shown) are both negative
- Monthly OBV has dropped back below its weighted moving average (WMA) but is still well above the long-term uptrend, line e
- There are no signs yet from either the daily or weekly OBV that the stock is bottoming
- Initial resistance is at $78 with further resistance at $81.60
The Walt Disney Company (DIS) closed at the monthly Starc+ band at the end of February 2011 and peaked at $44.34 the following month. DIS closed at $29 on Monday, which was below the monthly Starc- band at $29.67.
- There is good support on the monthly chart at $26.40 with further support at $22.80
- The RS analysis has pulled back to its long-term uptrend which goes back to the 2006 lows, line b
- The weekly and daily RS analysis (not shown) are trying to stabilize
- Monthly OBV confirmed the recent highs but is now below its weighted moving average. It is still holding well above the long-term uptrend, line c
- Volume last week at 65 million shares was well below the weekly volume of 205 million seen at the early-August lows.
Alcoa Inc. (AA) has been included in this review even though it is the tenth Dow stock on the oversold list. In reviewing the monthly charts, I noticed that AA had completed a monthly bear flag formation, lines d and e.
- AA closed at $8.90 on Monday, which was still above the monthly Starc- band at $8.74
- This suggests that at a minimum, the 2009 lows at $4.97 will be tested
- The RS analysis has also completed a flag formation, lines f and g, which is a negative sign
- Monthly OBV looks much better, as it has been considerably stronger than prices since the 2009 lows. It is now back below its weighted moving average
- The weekly and daily OBV (not shown) turned negative early in the year. They are both still negative
- There is first resistance now at $10.50 with stronger resistance in the $12 area
What It Means: The proximity of a stock or a market to its monthly Starc- band does not mean that it can't drop further. It does suggest, however, that the selling pressure is likely to subside over the next month or two and that the odds of a decent rebound are good.
Of the four stocks, Caterpillar Inc. (CAT) and The Walt Disney Company (DIS) are the most attractive from my perspective. I think that the economy is actually stronger than is reflected by the stock market. I also think that from a global perspective, food will be in short supply for years to come, which should be positive for CAT, and I'm looking for consumer spending to be stronger than expected in the last quarter of the year, which should make DIS a star performer.
On the negative side, the weak monthly chart of Alcoa Inc. (AA) does not bode as well for the economy or for the company's earnings, which will be released next week.
How to Profit: The Dow Industrials closed Monday at 10,655, which is still above the monthly Starc- band at 10,429.
With no signs yet of a bottom, I have no formal recommendations for either CAT or DIS at this time, but the key stop levels I am watching are at $49.82 for CAT and at $24.62 for DIS.