Gregg Greenburg interviewed Erin Gibbs, portfolio manager at S&P Investment Advisory Services in our Wall Street office recently, and she recommended four stocks for 2017 -- CBS (CBS) , Constellation Brands (STZ) , Monsanto (MON) and Aetna (AET) . Erin made the fundamental case for each of her selections, but I wanted to check the charts before signing off in agreement -- that's what I do. Maybe I can suggest a better (read lower) price for entry.
In the 12-month daily bar chart of CBS, above, we can see that prices have been stuck in a sideways consolidation zone for the past eight months. Declines to around $50 have been bought, and rallies to the $58 area have been met with selling. That is the price action; now let's look at our favorite indicators for clues. AET is above the rising 50-day simple moving average line and the slower to react 200-day moving average. The on-balance volume line has been stronger the past year and supports and confirms the price strength. The OBV line went sideways from March to mid-September, mirroring the price action. From mid-September the OBV line has broken out to a new high while the chart of CBS has not be able to close over $58. The OBV line can at times lead the price action, and older traders know from experience that volume often precedes price. The OBV line goes up when the volume of shares traded is heavier on days when CBS closes higher. Buying shares on an up day is a signal that buyers are being aggressive. Our 12-day price momentum indicator displayed in the lower panel is showing a bearish divergence versus the price action. This divergence is small and may not become a serious warning flag.
In the three-year weekly chart of CBS, above, we see that prices are in their third leg or rally up from an October 2015 nadir. Prices are above the rising 40-week moving average line. The OBV line on a weekly basis has been in a decline that I cannot explain. The trend-following moving average convergence/divergence oscillator just gave us a new go-long buy signal. CBS may not pull back all that much, so traders should look to get long or add to longs on a close above $58. A rally to the mid-to-upper $60s could be seen in the first half of 2017.
When you look at the daily chart of STZ above and you think about 2017, the obvious question is "Was this a top pick for 2016?" STZ has been in a strong uptrend, and every pullback has turned into a buying opportunity. Will we get another pullback and do we want to buy it? STZ recently declined below the flat 50-day moving average line. The OBV line has been steady even as prices have recently retreated. When prices dip and the OBV line is holding its own, it typically means that investors are holding and not dumping positions. A bearish divergence on the momentum study suggests we could pull back more and perhaps test the rising 200-day moving average line.
The weekly chart of STZ above is even more impressive. Prices are above the rising 40-week average line. The weekly OBV line confirms the price strength. The only warning sign is that the MACD oscillator is in a liquidate longs mode. What is that? When the two averages of this indicator cross to the downside when the readings are above the zero line, it is not a signal to sell outright but just to book some profits within an uptrend. Considering the long-running uptrend for STZ, traders should only expect limited softness to do their buying for 2017.
Traders looking to go long MON are likely to get it at a better level in the days ahead. In the daily chart of MON, above, we can see that prices have been working lower from a June peak. MON is trading below its declining 50-day average and only a fraction above the rising 200-day line. The OBV line peaked with prices and has recently made a new low for the move down. There is a small bullish divergence between the lower prices and higher momentum readings, but that is probably not going to interfere with MON trading down into the $94 to $96 area in the near future.
In the weekly chart of MON above, we can see a double bottom pattern around $85. Prices rallied to meet the upside price target from the bottom but have corrected down to the peak or crest between the two lows. MON is testing the rising 40-week moving average line. The OBV line is declining, telling us that sellers have been more aggressive, and the MACD oscillator is in a liquidate longs mode. This chart shows support beginning around $95, which dovetails with the daily chart. If we reach $95 and the OBV line starts to improve, I would join the party.
In the daily chart of AET above, we see a lot of sell signals, and we would be in no particular rush to go long. AET has broken below the declining 50-day average and the flat 200-day average. The 50-day average is poised to go below the 200-day for what is commonly called a "death cross." A death cross sounds bearish, and it is. If you decide to trade securities with a two-moving-average system, the signals to buy and sell come from the crossing of the two averages. In April these averages crossed in the other direction for a golden cross (bullish). Volume analysis on AET is giving me the most bearish signals, as the rally from February to June did not see much of an improvement in the OBV line while the subsequent decline has seen the OBV line move much lower. Momentum is not diverging from the price action.
When I look at the longer-term chart of AET above and think about the bearish daily chart above, I come away with the feeling I am looking at a major top formation. It is too soon to know for certain, but a weekly close below $100 will mean that most people who bought AET in the past two years are now "under water." Investors don't like losses, so I would anticipate they will become sellers at some point and prices could decline to the next chart support area around $85. A declining weekly OBV line fits in with this bear case, and the MACD oscillator is below the zero line for an outright sell signal.