Chemical stocks edged higher Friday after October factory orders came in better than expected, hinting at improving manufacturing activity despite the ongoing pandemic. The U.S. Commerce Department reported that the value of new factory goods orders rose 1% from September, notching up the sixth consecutive month of gains and exceeding analysts' expectation of a 0.8% increase.
- Chemical stocks edged higher Friday after October factory orders hinted at improving manufacturing activity.
- A breakout from a pennant pattern may see Eastman Chemical Company (EMN) shares move toward their 2018 high.
- DuPont de Nemours, Inc. (DD) shares also broke out from a pennant, suggesting a continuation of the current uptrend.
The industry also welcomed data last week showing China's Caixin Manufacturing PMI rising to 54.9 in November from 53.6 in October, indicating an acceleration in the recovery of the world's second-largest economy – a vital export market for leading U.S. chemical companies. Below, we take a more detailed look at two large-capitalization chemical stocks before turning to the charts to discuss possible trading tactics.
Eastman Chemical Company (EMN)
With a market value nearing $14 billion, Eastman Chemical is a global manufacturer of specialty chemicals. Despite the chemical producer reporting revenue declines across its operating segments in the third quarter, it said that it had entered the final months of the year with strong momentum. Moreover, managements expect fourth quarter earnings to be similar to the year-ago quarter at $1.42 per share. On the expenses front, the company said that it remains on track to deliver around $150 million of cost savings for the year. As of Dec. 7, 2020, Eastman Chemical stock issues a 2.69% dividend yield and has jumped 23.5% in the past month.
The shares have continued trending upwards after making a near-perfect V-shaped recovery from their mid-March low. Furthermore, the 50-day simple moving average (SMA) now sits above the 200-day SMA, confirming the stock's uptrend. Friday's breakout from a pennant may see price make a move toward the 2018 high at $112.45. Those who enter at these levels should think about placing a stop-loss order at either Friday's session low at $98.93 or under last week's low at $96.85, depending on personal risk tolerance.
A V-shaped recovery is a recovery that resembles a "V" shape in charting. It involves a sharp rise back to a previous peak after a sharp decline.
DuPont de Nemours, Inc. (DD)
DuPont de Nemours operates as a diversified global specialty chemicals company, servicing customers in the automotive, electronics and communication, construction, and safety and protection markets. Given the chemical maker generates roughly 15% of its total sales from the auto industry, data revealing that Chinese car sales rose 12.5% year over year in October has driven positive sentiment in recent weeks. Trading at $66.02, with a market capitalization of $48.45 billion and offering a 1.87% dividend yield, the stock has gained 14.03% over the past month, outperforming the industry average over the same period by nearly 4% as of Dec. 7, 2020.
After a slow, steady grind higher over the past six months, the share price broke out from a pennant Friday, suggesting a continuation of the current uptrend. Traders who favor momentum strategies should look for a test of $73.50 – an area on the chart that finds crucial overhead resistance from a year-long horizontal line. Protect capital by cutting losses if the stock closes beneath the pennant pattern's low at $63.02. The trade offers a risk/reward ratio of almost 1:2.5 (risk per share $3.01 vs. reward per share $7.48), assuming a fill at Friday's closing price.
The risk/reward ratio marks the prospective reward investors can earn for every dollar they risk on an investment. Many investors use risk/reward ratios to compare the expected returns of an investment with the amount of risk they must undertake to earn these returns.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.