Four Dow Plays for the Turn
The
Dow Industrials
has been under assault for months as the top tier of American icons succumbs to the brutal pressure of the credit crisis. Meanwhile, the Dow's twists and turns have made a spectacular return to the evening news, with folks all over the world
for signs that things are getting better or worse.
Individual components are also making the headlines, with
General Motors
(GM) - Get Report
currently at the top of everyone's radar. Before that, we had
American International Group
(AIG) - Get Report
, poster child for investment abuse and now a critical ward of the state, following its government bailout.
Sadly, AIG is no longer a Dow component. Keepers of the venerable index hate bad publicity and decided to replace the insurance carrier with
Kraft Foods
(KFT)
, which sounds like an odd form of social engineering. Given that company's recent string of bad luck, however, we could be headed for a cheese crisis of historic proportions.
But not all members of the Dow are falling apart these days. A few stalwarts have held their prices relatively well and look poised to benefit if the index finally stabilizes and starts to move higher. Being a part-time optimist, I'll look at the glass as half-full and highlight these issues, in case we get finally started on that elusive year-end rally.
McDonald's (MCD) |
Source: eSignal |
McDonald's
(MCD) - Get Report
surged toward six-week resistance between $58 and $60 after Thursday's reversal. This is a significant price zone because it marks the Oct. 6 gap down that triggered a deep plunge into the mid-$40s. Selling pressure has been drying up in recent weeks, with up days showing more conviction than down days.
The broad pattern is interesting because an ascending triangle started to form right after the October bungee jump. Notably, this is a common way for stocks to grind out double-bottom patterns. The high platform of the second low is bullish, and once broken to the upside can trigger a momentum rally back to the 52-week high in the upper $60s.
Kraft (KFT) |
Source: eSignal |
Newly minted component Kraft shows the most bullish volume pattern of the 30 stocks, with the exception of McDonald's. It makes sense because this is a classic recession play that pays a 4% annual dividend. However, even defensive issues are vulnerable to selling pressure these days, so it's best to wait for a clearer buy signal.
The chart shows a deep low, followed by a volatile bounce that fizzled out and gave way to persistent selling pressure. The stock jumped off monthlong support at $26 on Friday and could print a double bottom. However, the wide daily ranges in recent sessions point to more testing, so the best thing to do is wait for a breakout above the red channel.
Coke (KO) |
Source: eSignal |
Coca-Cola
(KO) - Get Report
rallied to a major high in January and sold off. The decline entered its third primary wave in September, with price hitting $40 before bouncing last month. It's been moving sideways since that time in an ascending triangle. A recovery attempt will run into resistance at a trend line in the $50s that currently corresponds with the 200-day moving average.
All signs point to the end of a major correction that will eventually give way to a new uptrend. This process will likely evolve into a Top-1-2-Drop-Up reversal, which is highlighted in my book,
. The buy signal will trigger when the trend line breaks, but that bullish event may be a few months away.
ExxonMobil (XOM) |
Source: eSignal |
Did you know that every member of the Dow is currently trading under its 200-day moving average?
ExxonMobil
(XOM) - Get Report
might be the first component to break this curse even though crude oil has been pulverized in recent months. The energy icon is now trading well above its October low and pushing against a trend line that goes back to May.
The stock reversed off that level on Friday and could drop back to short-term support in the mid-$60s before starting another recovery attempt. The 200-day moving average sits just 3 points above the trend line, so any buying surge will be slow to develop. However, momentum should overcome that gravity and lift price into the upper $80s.
Know what you own: Farley mentions the Dow Industrials. Other companies on the index include Johnson & Johnson (JNJ) - Get Report and Home Depot (HD) - Get Report.
At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.
Farley is also the author of
, a premium product that outlines his charts and analysis. Farley has also been featured in
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,
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,
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,
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. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.
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