The Dow's 10 most overbought stocks

The sharp reversal in the major averages last Friday makes identifying the most overbought stocks in the index now even more important.

By Jun 3, 2013 12:10PM

Stock index © Image Source, Getty ImagesBy Tom Aspray

As I reviewed in my Week Ahead column on MoneyShow, the weekly close in the NYSE Composite below the prior three-week lows suggests that June may be a difficult month for stocks. Since the weekly and daily A/D lines have confirmed the recent highs, any correction should be a pause in the major trend.

This month's starc band scan of the stocks in the Dow Jones Industrial Average ($INDU) can be helpful in identifying those stocks that should be considered for profit taking, as well as identifying those stocks that should be monitored for buying opportunities on a further correction.

For those who are not familiar with these monthly scans, it identifies the stocks that are closest to either the upper (starc+) or lower (starc-) bands. When a stock is near the starc+ band, it is a high-risk buy but that does not mean the stock cannot still go higher. If a stock closes above the monthly starc+ band for several consecutive periods, then it becomes increasingly more vulnerable.

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At the top of the list this month, is the Boeing Co. (BA), which closed at $99.02, 1% above the monthly starc+ band at $98.07. BA was up 8.3% in May and is up 31.4% so far in 2013.

Of course, the rest of the top ten stocks are also some of the year's best performers, but on a 5%-10% correction in the stock market, they still will be vulnerable. The completion of the reverse H&S formation in T-bond yields may also put some short-term pressure on the higher yielding large-cap stocks. Therefore, I have included the yields on the table and will focus on the four most interesting overbought Dow stocks.

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Chart Analysis: As the long-term chart reveals, it is quite unusual for Boeing Co. (BA) to close above its monthly starc+ band. The last time it occurred was in April of 2006.

  • The following month in 2006, BA made new highs and exceeded the starc+ but did not close above it. It lost 19.4% over the next four months.
  • The blue circles show that the monthly starc+ band was also approached in June 2007 and March 2010.
  • The May high at $101.47 was still well below the all-time highs at $107.83 from July 2007.
  • The relative performance broke its long-term downtrend, line b, in March when BA closed at $85.85.
  • The OBV also broke out in March as it surpassed the resistance at line c.
  • It was a positive sign that the OBV was able to hold its multi-year uptrend, line d.
  • There is initial support at $97.07 and the monthly pivot. There is additional support at $92.67.
  • The major 38.2% Fibonacci retracement support from the 2012 low is at $88.24.

American Express Co. (AXP) closed above the 2007 high, line e, at the end of March. Therefore the $65.90-$66.20 area is now a major level of support.

  • The last time AXP closed near its monthly starc+ band was at the end of 2006.
  • The weekly chart of AXP (see insert) shows that it formed a doji last week and an LCD will be triggered on a weekly close below $75.39.
  • The monthly pivot is at $73.75 with the S1 at $70.13, which is also close to the minor 50% Fibonacci support level.
  • The relative performance has moved through its resistance at line g and is well above its flat WMA.
  • The monthly OBV just broke out at the end of April (line h) and has support going back to 2010, line i. It is below the 2006 high.
  • The weekly studies are all positive and have confirmed the recent highs. This is consistent with a correction that will be well supported.

Click to Enlarge

Johnson and Johnson (JNJ) is a stock that I have been trying to buy since February, and it appears to have formed a near-term top at $89.99 on May 22.

  • JNJ has corrected 6.4% from the highs but is still up over 20% for the year.
  • The monthly chart shows what is called a gravestone doji as the open, low, and close are near the same levels.
  • The monthly pivot support is at $82.04 with the major 38.2% Fibonacci support from the 2012 lows now at $78.96.
  • The former breakout level, line a, is at $74.50.
  • The relative performance broke its downtrend, line b, in February but is still well below the 2011 highs.
  • The monthly on-balance volume (OBV) looks much stronger as it broke out in late 2011 and has made a series of higher highs as it is leading prices higher.
  • There is initial resistance now at $86.56 to $88.29.

The monthly chart of the Walt Disney Co. (DIS) also shows a gravestone doji, and as is the case withJNJ, a monthly LCD could be triggered in June.

  • DIS is down almost 7% from the early May high of $67.89.
  • The insert of the weekly chart shows that DIS closed above its weekly starc+ band for two weeks in early May before triggering a LCD (see arrow).
  • There is next support in the $60.50-$61.20 area with the 38.2% support from the May lows at $59.80.
  • The monthly relative performance overcame strong resistance, line f, in early 2012.
  • The RS line has confirmed the new highs and is well above its rising WMA.
  • The OBV broke through its resistance, line h, at the end of November and has been acting very strong.
  • The OBV is well above its rising WMA.
  • There is first resistance in the $65.60 to 67.15 areas.

What it Means: Both Boeing Co. (BA) and American Express Co. (AXP) still look quite positive from the monthly charts, but I would not be surprised to have them see a one-two month correction as the overall market is looking more vulnerable. They could easily drop 5%-10% from their May highs.

Since both Johnson and Johnson (JNJ) and Disney Co. (DIS) have already corrected significantly from the recent highs, their correction may be already half over. Since both show strong weekly and monthly OBV patterns, a further correction should be a buying opportunity.

How to Profit: No new recommendations for now.

More from

Jun 3, 2013 2:08PM

The article is titled "10 Most Overbought Dow Stocks" and only mentions four.  Well done, Tom Aspray...

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