Legal woes are slowly taking their toll on Dow component Johnson & Johnson (JNJ) despite corporate denials and vigorous defenses by the company's high-paid legal teams. A $572 million judgment in an Oklahoma opioid case earlier this week marked the latest setback, ironically triggering a rally day because the state asked the court for an enormous $17 billion verdict. The company said that it will appeal the order.

Longstanding legal issues came to light in December when Reuters reported that the drug manufacturer knew "for decades" about asbestos in Johnson's Baby Powder. The allegations, which were assembled after plaintiff prompts and a review of documents released in active litigation, were disputed by a company spokesman who called the report "false and misleading." However, the denial hasn't stemmed the flow of lawsuits or efforts to settle outstanding cases before they hit trial.

Johnson & Johnson has produced tons of evidence attesting to the safety of its products, but the market hates uncertainty, raising the odds that investors will avoid the stock well into the next decade. However, that isn't realistic because Dow members are also components in nearly all big-cap funds, increasing the odds that many of us are exposed through 401(k) and other retirement plans that load up on exchange-traded funds (ETFs) or mutual funds.

The stock has dropped into the lower third in component performance after two failed attempts to mount resistance at the January 2018 high near $150. It's trading under $127 on Thursday, Aug. 29, less than 10 points above critical support near $118, which marked the May 2018 low. A decline into that trading floor could be catastrophic, completing a triple top breakdown that signals the end of the 10-year uptrend.

JNJ Long-Term Chart (1994 – 2019)

Long-term chart showing the share price performance of Johnson & Johnson (JNJ)

A three-year downtrend ended at a split-adjusted $9.00 in 1993, giving way to a powerful trend advance that posted a long string of new highs into the 2002 high at $65.89. It fell into the $40s a few months later, marking the lowest low in the past 17 years, ahead of range-bound action that posted failed breakouts in 2005, 2006, and 2008. The final impulse reached $72.76 before turning tail in a steady downtrend that accelerated during the economic collapse.

The stock posted a seven-year low in the mid-$40s in March 2009 and turned higher, but the uptick failed to reach the 2008 high until a 2012 breakout that generated three rally waves into the January 2018 high at $148.32. The subsequent decline ended at $118.62 in May, while a fourth quarter breakout posted an all-time high less than a point above the January peak before reversing in a vertical swoon that found support three points above the May low.

The recovery wave into 2019 floundered in June at the .786 Fibonacci sell-off retracement level, which marks a high-odds reversal zone. It has been all downhill since that time, declining in two selling waves that have reached within five points of the December low. Recent price action has been testing new resistance at $130, so that's the upper boundary for the short-term trading crowd to watch in coming sessions.

The monthly stochastics oscillator reached the overbought level in October 2018 and crossed into a sell cycle two months later. Although this signal has now entered the ninth month, the indicator has just crossed the panel's midpoint. This is an especially bearish set-up, predicting that sellers will remain in control into the first quarter of 2020. In turn, that could exert enough downward pressure for a triple top breakdown.

The Bottom Line

The uncertainty surrounding legal cases is weighing on Johnson and Johnson shares, raising the odds that the stock will break 2018 support and enter a bear market.

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