3 stocks to profit from a weak dollar
Given the strong technicals, we can define a good entry and exit strategy for each.
By MoneyShow.com Apr 14, 2011 1:23PM
By Tom Aspray, MoneyShow.com
Even though the dollar has attempted to stabilize this week, there are no signs yet of a sustainable bottom. The euro closed above the long-term downtrend in the area of $1.44 per euro last week, with next resistance in the $1.46-$1.48 range.
A weak dollar does have some positives for the US economy, as it makes our exports cheaper, and those companies that derive a majority of their business from global sales will benefit more if the dollar remains low.
Three large multinational companies I like are United Technologies (UTX), McDonald’s (MCD), and Danaher Corporation (DHR). These three companies derive anywhere from 55% to 65% of their business from overseas, and all three look positive technically.
Chart analysis: The weekly chart of the dollar index futures shows that last week’s close was just below the support that goes back to the lows made in late 2010 (line b).
- The next support on the weekly chart is at 74.20, line c, which corresponds to the 2009 lows. If this level is broken, then the next major support is in the 71-71.50 area, which is a level that the dollar reached in 2008
- The weekly on-balance volume (OBV) turned negative last summer when it violated its weighted moving average (WMA) and it is still in a solid downtrend, line d
- The daily OBV (not shown) is trying to bottom, but a rally from current levels should be met with additional selling
- There is first resistance now in the 76.40-77 area with stronger resistance at 78.50-79, which corresponds to the downtrend on the weekly chart, line a
United Technologies (UTX) is a $77 billion conglomerate that in addition to its aerospace business has a wide range of other products, deriving almost two-thirds of its business from global operations. UTX currently has a 2% yield and just recently surpassed its all-time high from 2008 at $82.50.
- The daily chart shows that UTX recently made a new high, and its relative performance, or RS analysis, shows that it has been outperforming the S&P 500 since the March lows
- UTX is now testing it rising 20-period exponential moving average (EMA) with further support now at $82.60, which is the 50% support level from the recent rally
- There is additional chart support at $81.50 and $79.40, which should hold on a deeper pullback. The March lows at $77.05 (line f) represent key support
McDonald’s (MCD) is an $80 billion company that operates its popular restaurants in 117 countries. Over the past few years, it has established quite a presence in many of the emerging market countries. It has a current yield of 3.2% and is 3.8% below its all-time highs from December 2010 at $79.94.
- The resistance on the daily chart at $77.25 (line a) was overcome on Wednesday, but MCD was not able to close above it. There is initial support now at $75.90-$76.50 and the rising 20-day EMA
- More important support is in the $73-$73.60 area, which corresponds to the long-term uptrend, line c, and also the March lows (line b)
- The daily OBV has broken out to the upside having overcome resistance (line d) at the end of March. The OBV and its weighted moving average are both rising nicely, which is a positive sign. The weekly volume (not shown) is also above its WMA
- A close above the resistance at $77.70 should signal a test of the all-time highs at $79.94. There are additional upside targets now at $81.50 and then at $83.40
Danaher Corp. (DHR) is probably a less-familiar name to most, as it is a $34 billion conglomerate that is involved in instrumentation, medical technology, and tool and tool components. The instrumentation division is a main player in water purification, and therefore, DHR is a holding in most water ETFs.
- The daily chart of DHR shows that it tested the 20-day EMA on Wednesday and closed strong. It is not far below its all-time highs at $53.01
- A move above the resistance at line e would project a move to the $56-$57 area
- The daily OBV made new highs with prices two weeks ago and is close to moving back above its weighted moving average. The weekly OBV (not shown) is acting much stronger than prices and could make new highs this week
- There is short-term support now at $51-$51.65 with stronger support at $49.50-$50.50. The daily chart shows a gap between $48.20 and $48.93 that should not be completely filled on any pullback
What it means: These three large-cap multinationals should clearly benefit from a further decline in the dollar, and even if the dollar does manage to stabilize, all three have good domestic businesses as well. Both UTX and MCD have attractive yields and the technical action for all three is positive.
How to profit: For these three stocks, I would recommend a two-stage buying strategy with one position established at short-term support and the other at longer-term support. It is important to have stops in place on both positions so that your risk is well defined.
For UTX, I recommend going 50% long at $82.96 and 50% long at $82.34 with a stop at $79.23 (risk of approx. 4.1%). On a move above $86.20, raise the stop to $81.88.
For MCD, go 50% long at $76.46 and 50% at $75.54 with a stop at $72.67 (risk of approx. 4.4%). On a move above $79.60, raise the stop to $74.77.
And for DHR, go 50% long at $51.88 and 50% at $50.64 with a stop at $48.14 (risk of approx. 6%). On a move above $54.40, raise the stop to $50.78.
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