MorningWord 7/15/13: In a week that saw new all time highs for the Dow Jones Industrial Average, Friday’s price action in Dow component BA (-4.69%) and fellow large cap industrial UPS (-5.83%) stuck out to me as both stocks had just made or almost made new multi-year highs (BA got close to its all time in 2007). Both stocks had been darlings of the recent bull run, and both stocks sold off from highs on massive volume (largest volume days in more than a year). From a purely technical perspective, it was important that they at the very least maintained their slow churn higher, or at least consolidated for the next leg higher.
As many readers know, I don’t consider my self a technician by any means, but I do use technical analysis as an important input to my trading process in an effort to identify inflection points and to help inform my strikes for options trades. BA and UPS caught my eye Friday for different reasons. BA struck me because the news was very stock specific and my thought was that it would be very telling to see how the stock reacts early this week after such an important technical rejection at the previous highs, on VOLUME:
UPS is interesting because the fundamental news (negative Q2 pre-announcement, here) has broader implications for the economy and most importantly its U.S. multi-national peers. But again from a technical perspective, UPS appears to be breaking down at the previous high, on VOLUME:
These 2 charts of 2 market leaders obviously look “double toppy” but as a trader, trying to pick tops in past leaders is a dicey proposition, and if they are able to shake of the recent negative news and consolidate just below the highs, my sense would be that new highs could be in the cards.
But I would say that I am starting to put together a lists of stocks that are making similar sort of patterns that could have similar price action on the slightest bit of negative news. Two other poster children for the recent leg of the rally have been HD and JNJ. Looking at HD first, the one year chart shows the stocks re-test of the previous all time high made in May:
How the stock reacts here, if it can breakout with volume confirming the move, may be very telling for the broad market as the SPX once again approaches the previous highs made in May. The 18 year chart below, showing the stock’s run-away breakout from the highs made in the internet bubble show tremendous continued upward momentum and the very price action that we could see in stocks like BA and UPS if they were able to regroup a bit in the coming days/weeks:
JNJ has a nearly identical 1 year pattern to that of HD, as it also is approaching the previous highs:
But the massive difference here is that JNJ’s long term breakout is so massive relative to the previous 10 year range, that the prior long term resistance level at ~$70 could serve as support for years to come.
So what’s it all mean? On a short term basis, especially as we head into earnings, it will be very telling to see how market leaders react to stock specific news. But I would also add that not all breakouts are created equal. While rising tides can certainly lift all boats, BA and UPS are cheap stocks trading at or near market multiples with better than average growth profiles, while HD and JNJ are trading well above market multiples for less than average growth. If sturdy, relatively cheap industrial stocks can drop 5% in a heartbeat on bad news, I would hate to think what consumer-focused low growth expensive stocks would do under the similar circumstances.