Tobacco stocks got sold aggressively in late July after the Food and Drug Administration (FDA) announced a comprehensive regulatory plan that featured an outline for tobacco-related policy and enforcement in the coming decade. The statement included an intention to start a public dialogue on nicotine levels and issue new guidelines for e-cigarettes, a huge industry profit maker in recent years.

Despite the best intentions, the FDA plan is unlikely to affect smoking habits locally or abroad, given broad mistrust of U.S. government regulatory agencies as well as lax enforcement of local regulations throughout Asian nations that have generated windfall profits for these industries in the 21st century. In addition, the sector decline has now reached deeply oversold technical levels, raising the odds for recovery waves that could reinstate long-term uptrends. (See also: Tobacco Stocks Get Smoked After FDA Orders Lower Nicotine Levels.)

Altria Group, Inc. (MO) stock rallied above the 2008 high at $24.55 in 2011 and entered a powerful trend advance that eased into a rising channel in 2015. It continued to grind out new highs into June 2017, when it posted an all-time high at $77.79 and turned lower, breaking channel support in late July. It printed a volatile low at $60.01 just after the FDA news and bounced to new resistance in the same session.

Price action in the past two months has carved a slow-motion decline that is still testing the July low. The stock turned higher last week, gaining nearly four points in three sessions, and it is now testing resistance at the 50-day exponential moving average (EMA). A rally above that level may offer a low-risk entry, while continued upside through channel resistance at $68 would issue a stronger buy signal, presaging a trip back to the 2017 high. (For more, see: Altria Hikes Dividend by 8.2% Despite Industry Headwinds.)

Philip Morris International Inc. (PM) shares topped out in the mid-$90s in 2013 following a multi-year uptrend and sold off in a persistent decline that found support eight months later in the mid-$70s. The stock tested that level twice in 2015 and turned higher, mounting range resistance in the second quarter of 2016. Philip Morris shares then spent more than a year testing round number resistance at $100 ahead of a rally wave that reached an all-time high at $123.55 in June 2017.

The stock sold off to the 200-day EMA after the FDA news, bounced back to broken range support and has traded within the boundaries of the sell-off bar for the past two months. It dropped to the lowest low since July earlier this week and could reverse here, completing a double bottom pattern ahead of a bounce that will issue a strong buy signal following a breakout above the three-month trendline​ of lower highs. (See also: 8 Undervalued Stocks to Weather a Market Downturn.)

British American Tobacco PLC (BTI) shares topped out at $40.52 in January 2008 following an eight-year uptrend and sold off to $21.63 during the bear market. The stock bounced back to the prior high in 2010 and broke out six months later, entering a trend advance that stalled in the lower $60s in June 2014. The stock spent nearly three years grinding sideways ahead of an April 2017 breakout that posted an all-time high at $73.41 in June.

The subsequent decline unfolded in three waves that dumped the stock to a six-month low at $60.15 in late July. It has held above that low for the past two months but made limited progress, posting two failed breakout attempts at the 200-day EMA. Traders should look for a third attempt to unfold in the coming weeks, with a rally above $65 signaling the end of the correction ahead of a bounce back to the 2017 high. (For more, see: Tobacco Giants Push New 'Alternative Products'.)

The Bottom Line

Tobacco stocks are deeply oversold after a vertical July decline gave way to two months of narrow consolidation that failed to attract bottom fishers. Traders should look for rally attempts to strengthen as long-term cycles flip to the buy side, allowing these stocks to recover at a rapid pace. (For additional reading, check out: Back From the Dead: Why Tobacco Stocks Are Soaring.)

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