Johnson & Johnson Stock Shaking Off Legal Headwinds

Dow component Johnson & Johnson (JNJ) has quietly shaken off headwinds generated by accusations of tainted baby powder and gained ground with broad benchmarks in the fourth quarter. The stock has attracted a steady flow of buying interest during this period, with formerly sidelined investors climbing the wall of worry in place since a Reuters report in December 2018 kicked off the latest chapter in this multi-decade controversy.

The company made headway on the legal front in October after the Food and Drug Administration (FDA) reported asbestos in a bottle of baby powder, disputing the findings with 15 new tests that showed no contamination. The results should assist in the defense of multiple lawsuits that are likely to drag on for many years. More importantly, the court of public opinion will issue the final judgment, with the stock price a good barometer of that complicated process.

Johnson & Johnson also faces fallout from a rising number of opioid lawsuits and investigations, but that's par for the course for a blue-chip drug manufacturer in the 21st century. The company is currently working on a nationwide settlement with an association of state attorneys general and have set aside capital to pay for their negligence, if found liable. As a result, this exposure may not have a major impact on future earnings and profits.

The stock has posted a 6% return in the first 11 months of 2019 compared to the Dow's 22% return, highlighting resiliency in the face of negative sentiment and legal woes. It has shaken off three attempts to break long-term support at the 200-week exponential moving average (EMA) during this period, indicating that bears have failed to end the uptrend in place since the 2009 low. In turn, this bodes wells for an eventual breakout above January 2018's all-time high at $148.

JNJ Long-Term Chart (2002 – 2019)

The stock ended a multi-decade uptrend in the mid-$60s in 2002, establishing a resistance level that took more than 10 years to mount, ahead of a choppy sideways action and a 2008 decline that found support in 2009 at a seven-year low in the mid-$40s. A slow-motion uptick completed a round trip into range resistance in 2013, setting off an immediate breakout that attracted widespread buying interest.

The uptrend posted impressive gains before stalling near $110 in 2014 and dropped like a rock during the August 2015 mini flash crash. It bottomed out at a two-year low in the low $80s in that session, while the subsequent bounce broke out to new highs in the second quarter of 2016. The stock continued to gain ground into January 2018, posting an all-time high when broad sentiment started to deteriorate due to escalating trade tensions.

Outlook Into 2020

Price action in the past two years has carved the outline of a symmetrical triangle, bounded by resistance in the $140s and support now situated near $125. This garden variety corrective pattern is constructive following a long-term uptrend, highlighting the failure of bears to generate technical damage or a change in trend. All signs now point to a bullish resolution, perhaps as early as the first quarter of 2020. 

The monthly stochastics oscillator crossed into a buy cycle from the oversold zone in October 2019, predicting relative strength into the new decade. This impulse is strengthening, raising the odds for continued upside that reaches triangle resistance now situated near $145. The pattern has already carved five waves, which are typically followed by a breakout or breakdown. The successful test at triangle support between August and October has shifted the odds in favor of a bullish outcome, once again highlighting the possibility of a 2020 breakout to new highs.

The Bottom Line

Johnson & Johnson stock is showing no signs of technical damage despite an endless flow of legal developments, raising the odds that it will break out to a bull market high in coming months.

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