A look at the charts of these blue chips shows a lot of potential strength right now, but one in particular is ready to buy on the next significant pullback.

After a very weak April and May, stocks put in a strong performance in June, which made a dramatic difference in the quarterly sector performance. It is not too surprising that some of the best-performing stocks were those that show up on my monthly Starc band analysis of the Dow Industrials.

As a quick refresher on Starc band analysis, when prices are near to their monthly Starc+ band, it means that the stock is a higher-risk buy than if it were close to the lower monthly or Starc- band. The scan also highlights those stocks that are performing stronger or weaker than the S&P 500.

  • For more on trading with Starc bands, click here.

The monthly chart analysis can also offer a different perspective, and can help one spot important breakouts as well as key support levels. In the majority of cases, prices will respect monthly support, but there are exceptions.

chart

Click to Enlarge

The most overbought Dow stock at the end of June was Wal-Mart (WMT). It closed at $69.72, which was just 1.9% below the monthly Starc+ band at $71.03. WMT was one of the stocks I recommended in April, when longs were established at an average price of $60.21 and a stop at $57.78, which was well under the prior three-month low of $58.21.

In late April, news of the Mexico bribery scandal hit WMT stock hard, as it dropped to a low of $57.18, the lowest level since last November. Our longs were stopped out but by the end of May. (WMT had closed at $65.82 and above major resistance that went back to 2002.)

This definitely hurt, but I wanted to include it as it is a good example of how even the best-laid plans do not work. Additional attempts to rebuy WMT have been unsuccessful, as there has been little in the way of a pullback.

Let’s look at the four stocks on the most overbought list that have the most interesting charts.

chart

Click to Enlarge

Chart Analysis: The monthly chart of Wal-Mart (WMT) shows the major resistance, now support, in the $64 area (line a).

  • Though not visible on the chart, the breakout resolved a ten-year, $22 trading range that has upside targets in the $84 to $86 area

The arrow shows the break below the major monthly support in late April

The relative performance, or RS analysis has formed a long-term uptrend going back to 2007 (line b)

Over the past two months, the RS line has surged above the 2011 highs and its rising WMA

The monthly on-balance volume (OBV) broke through its downtrend (line c) in late 2011, and is acting very strong as it has confirmed the breakout

There is initial support now around $66 to $67.50, and then in the $64 area

This long-term chart of AT&T (T) goes back to 2000, and shows the close above its long-term downtrend (line d) two months ago. Those who have been patient with this perennial blue-chip favorite finally have been rewarded, as it is up almost 16% since the start of April.

  • The monthly chart shows next major resistance in the $40.70 to $43.20 area (line e)

The RS analysis just tested long-term resistance (line g). It moved back above its WMA at the end of April

The relative performance had formed a long term base over a seven-year period (line h)

The monthly OBV looks even stronger, as it surged through major resistance (line i) at the end of March

The weekly RS and OBV analysis (not shown) have both confirmed the price action

There is initial support in the $34.30 to $35 area with stronger levels near $32

NEXT: A Buying Opportunity in a Market-Leading Sector

chart

Click to Enlarge

The monthly chart of Walt Disney (DIS) shows that it has closed higher for the past two months, as the resistance going back to 2000, in the $44.70 area (line a), has been overcome.

  • The monthly Starc+ band is now at $51.65, which is 6.5% above close at the end of June

The 127.2% Fibonacci retracement target from the 2011 correction was $48.95, which was hit in June

The RS analysis has confirmed the breakout, as it made new rally highs in June. It also shows a long-term uptrend (line b) The monthly OBV moved above its WMA at the end of 2011, and has confirmed the new highs

There is initial support now at $47.60, with stronger levels to follow at $45 to $45.50

Key monthly support sits at $40.88, which was the April low

The health-care sector was quite strong in June, as the Select Sector SPDR Health Care (XLV) was up well over 7%. Merck (MRK) is now becoming a market leader, as the January 2010 high of $41.56 (line d) has been overcome.

  • MRK traded in a very tight range over the past five months, with monthly support now at $36.90

The relative performance has completed a bottom formation, having moved above key resistance (line f). This confirms the uptrend (line g)The OBV surpassed major four-year resistance (line h) in early 2012. It shows a very bullish pattern

The weekly technical studies (not shown) are also strong and confirming prices

MRK did close well above its weekly Starc+ band last week, which increased the odds of a pullback

There is minor support now at $40.20, with stronger levels in the $39-$39.40 area

What it Means: Many of the stocks on the most overbought list have been on my buy list for the past several months, but because of my emphasis on risk control the recommended buy levels have not been hit.

Therefore, my buying levels in stocks like Walt Disney (DIS), Verizon (VZ), Wal-Mart (WMT), and Home Depot (HD) have not been hit. I am looking for a pullback in all of these stocks to open a buying opportunity. However, new longs in Merck (MRK) are now recommended

How to Profit: For Merck (MRK), go 50% long at $40.52 and 50% long at $39.66, with a stop at $38.12 (risk of approx. 4.9%).

Portfolio Update: Buyers should be 66% long AT&T (T) from $28.57, with a stop level at $31.77. I previously advised selling one-third of the position at $34.11 or better.

  • For a look at the full Charts in Play Portfolio, click here.
Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Fractal Markets Hypothesis (FMH)

    An alternative investment theory to Efficient Market Hypothesis ...
  3. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  4. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  5. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  6. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!