It's that time of year again -- every January, scores of investors flock to the "Dogs of the Dow." But this year a twist on the typical Dow Dogs strategy is providing a big opportunity for investors who are paying attention to the price action.
For the last two decades, the "Dogs of the Dow" has been one of the most widely circulated investment strategies out there, offering individual investors a simple formula to beat the market: Simply buy the 10 highest-yielding Dow Jones Industrial Average stocks at the start of each year, and hold on.
It may be simple but it's effective.
When Michael O'Higgins introduced his strategy in 1991, it took the market by storm -- backtesting showed that the Dogs of the Dow strategy significantly beat the broad market from the 1920s on. The justification was that the big names of the Dow don't kowtow to market conditions, so their high dividends reflect strong businesses trading cheaply.
But that's not the whole story. As every investors knows, cheap stocks can get even cheaper -- and that's why it makes sense to overlay some technical analysis on the classic Dogs of the Dow approach. The results are pretty compelling: Of the 10 highest-yielding stocks in the Dow right now, five also look attractive from a technical standpoint. Put simply, these big stocks are teetering on the verge of breakout territory.
Today, we'll turn to the charts for a closer look at which of the Dow Dogs you should buy in 2017.
First, a quick note on the technical toolbox we're using here: Technical analysis is a study of the market itself. Since the market is ultimately the only mechanism that determines a stock's price, technical analysis is a valuable tool even in the roughest of trading conditions. Technical charts are used every day by proprietary trading floors, Wall Street's biggest financial firms, and individual investors to get an edge on the market. And research shows that skilled technical traders can bank gains as much as 90% of the time.
Every week, I take an in-depth look at big names that are telling important technical stories. Here's this week's look at five big stocks to trade.
Leading things off is oil and gas supermajor Chevron (CVX) . Chevron may only offer the third-best yield in the Dow right now, at 3.7%, but it's showing off one of the most compelling chart patterns. Shares have been rallying hard in recent months, leading the rest of the energy sector 31% higher in the last 12 months. And now, a classic price setup is signaling a second leg higher for Chevron.
Chevron's price setup is an ascending triangle pattern, a bullish continuation pattern that's formed by horizontal resistance up above shares at $119, and uptrending support to the downside. Basically, as Chevron bounces in between those two price levels, it's been getting squeezed closer and closer to a breakout through our $119 price ceiling. When that breakout happens, we've got our buy signal.
Evidence of Chevron's price leadership comes through in the form of relative strength, the indicator down at the bottom of CVX's chart. Relative strength measures Chevron's performance versus the rest of the stock market, and the fact that it's still holding onto a series of higher lows means that this energy giant is predisposed to keep on outperforming in 2017. Shares are within grabbing distance of their $119 breakout signal as I write...