Johnson & Johnson Stock at Cusp of Historic Breakout

Dow component Johnson & Johnson (JNJ) could break out to all-time highs in the coming weeks, despite high-profile baby powder litigation and other drug sector headwinds. The rally should reflect growing demand for high-dividend plays in reaction to falling bond yields, underpinned by the company's reputation as a safe haven in the tenth year of an economic expansion. Johnson & Johnson currently pays a respectable 2.56% forward dividend yield.

The stock has now reached the top 10 in Dow component performance after posting a 13% return in 2019. It reversed at the January 2018 high in the upper $140s in mid-December, a price level that also triggered a reversal in December 2018. However, price action is showing resilience at this two-year-old barrier, even though the company posted mediocre profits and revenues in its fourth quarter report, released on Jan. 20.

JNJ Long-term Chart (1990 – 2020)

A 1990 breakout gathered significant momentum, triggering three stock splits while lifting price in multiple rally waves into the 1999 high at $53.44. Volatility then increased rapidly, triggering a steep decline, followed by a final rally impulse into the mid-$60s after the Sept. 11 attacks. That marked the highest high for the next three years, ahead of consolidative action on top of new support at the 1999 peak.

A 2005 uptrend topped just below $70 at year end, while breakout attempts into 2008 failed, giving way to a steep decline that posted a seven-year low during the economic collapse. That marked a historic buying opportunity, ahead of a two-legged recovery that completed a round trip into the 2008 peak in 2013. An immediate breakout attracted significant buying interest, generating the most prolific gains so far this century into the 2014 high at $109.49.

A 2016 recovery wave cleared new resistance ahead of the presidential election, setting off a healthy uptrend that posted a series of new highs into the January 2018 top. The stock then reversed into a trading range, finding support under $120 in May. A successful December test at this level attracted committed buying interest, generating a two-legged 2019 advance that carried within a point of stubborn resistance in December 2019.

Bullish January price action completed the retracement, lifting the stock less than one point above the December 2018 high at $148.99. It reversed at this level on Friday morning, telling observant market players that two-year resistance remains firmly in place despite the minor penetration. However, there are good reasons to believe that the stock will consolidate around this level ahead of a historic breakout. 

For starters, the monthly stochastics oscillator has just crossed into the overbought zone, setting off a "stochastics pop" buy signal, first discussed by Jake Bernstein in his 1995 book "The Compleat Day Trader." (See also: Stochastics: An Accurate Buy and Sell Indicator.) This placement predicts that relative strength will increase despite growing headwinds, allowing bulls to control the tape. In turn, the signal could add momentum to a breakout, adding points at a rapid pace.

JNJ Short-Term Chart (2017 – 2020)

Adding to the bullish outlook, the on-balance volume (OBV) accumulation-distribution indicator has lifted above the November 2018 peak to an all-time high. This bullish divergence predicts that price will soon play catch-up, suggesting that the breakout could come at any time. The upside for this event looks substantial, with a measured move target around the $180 level. That impressive gain and healthy dividend payout could help investors achieve their 2020 profit goals.

The Bottom Line

Johnson & Johnson stock looks set to break two-year resistance under $150 and enter a trend advance that could lift the drug giant to the top of the Dow Industrial leadership board.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.