Dow component United Technologies Corporation (UTX) spent the first three quarters of 2017 underperforming its defense contracting peers, but the stock has surged higher since September and has now reached major resistance at the 2015 bull market high. In turn, this price action has completed a multi-year inverse head and shoulders pattern, with a breakout having the potential to reach the $160s.
United Technologies shares bottomed out on Sept. 6, just one day after the company announced the acquisition of Rockwell-Collins, Inc. (COL) in a mega-deal expected to close by the third quarter of 2018. Concerns about high debt levels and government approval generated headwinds during the subsequent uptick, which has now reached the mid-$120s, marking the level at which 2014, 2015 and July 2017 rallies ended in major reversals. (See also: Rockwell Collins Clinches $30B Deal With United Technologies.)
The stock could have better luck this time around because the long-term price structure finally looks complete, with declines into October 2014 and September 2017 carving an inverse head and shoulder neckline that should generate strong buying signals when the price lifts above $125. And the timing couldn't be better, with the start of 2018 likely to free up large tranches of institutional capital looking for fresh exposure.
UTX Long-Term Chart (1994 – 2017)
The stock ended a five-year rally at $7.56 in 1987, ahead of a broad trading range that persisted into an October 1993 breakout and trend advance. It posted two stock splits before topping out in the upper $30s in May 1999 and eased into a volatile diamond pattern, bottoming out in the lower $20s after the Sept. 11 attacks. It broke pattern resistance in 2003 and cleared the four-year high a few months later, joining other Dow components in the mid-decade bull market.
United Technologies shares more than doubled in price into the October 2007 high at $82.50 and then turned sharply lower during the 2008 economic collapse, dropping in multiple waves that found support in the mid-$30s in March 2009. The subsequent recovery wave unfolded at the same trajectory as the decline, completing a V-shaped pattern and 100% retracement into the prior peak in the first quarter of 2011.
It spent the next two years testing that price level, ahead of a 2013 breakout that ended near $125 in February 2015. The subsequent correction found willing buyers at new support in the first quarter of 2016, generating a steady uptick that reached the 2015 high in July 2017. The stock has spent the past five months carving a higher low that has completed the right shoulder of a thee-year inverse head and shoulders pattern. (For more, see: How United Technologies Makes Its Money.)
UTX Short-Term Chart (2014 – 2017)
The stock sold off after reaching $120 in April 2014 and bounced near $100, carving a rally wave that completed the pattern's left shoulder when it exceeded the prior peak by less than five points. The decline into 2016 printed the pattern's head 41 points lower, generating a long-term measured move target in the mid-$160s. Meanwhile, price action between 2015 and 2017 has embedded a cup and handle within the inverse head and shoulders pattern, raising the odds for a dramatic breakout.
On-balance volume (OBV) topped out in June 2014 and entered a distribution wave that ended at the left shoulder. It posted a lower 2015 high, signaling a bearish divergence that generated intense selling pressure into January 2016. Committed buyers have taken control since that time, lifting the indicator within stone's throw of the 2014 and 2015 highs. This matches bullish price action, suggesting that a final surge of buying power will break multi-year resistance and set the trend advance into motion. (See also: United Technologies Beats Q3 Earnings, 2017 View Up.)
The Bottom Line
United Technologies stock has rallied back to multi-year resistance, completing a long-term breakout pattern, and it could post significant 2018 gains. A rally above $125 should attract aggressive buying pressure, supporting a quick rally toward $140, with a long-term upside target above $160. (For additional reading, check out: 5 Safe Haven Dividend Plays.)
<Disclosure: The author held shares of Rockwell-Collins in a family account at the time of publication.>