by Daniel Putnam | August 14, 2013 1:17 pm
It’s said that nobody rings a bell at the top, but sometimes the charts provide the next-best thing. When a stock or index breaks below both its long-term lower trendline and its 200-day moving average, it’s often a sign of a major change in direction and a clear signal that it’s time to hit the sell button — or at least buy some protection.
Three important large-cap, blue-chip stocks are in this position right now, and three more are nearing levels where investors need to be on alert.
At first glance, International Business Machines (IBM) looks like an interesting buy candidate — it’s well off of its high for year, it’s trading at a below-market multiple, and it has a nice 3.8% dividend yield.
Upon closer inspection, however, the chart is showing a stock in a perilous position. Not only has IBM moved firmly below its five-year lower trendline, but it has dropped below both its 200-day MA and a secondary trendline that has been in place for roughly two years.
In all likelihood, this chart is saying that IBM will continue to underperform no matter which direction the broader market goes in the months ahead.
Deere & Co. (DE) is a similar story to IBM: It has fallen off of its 52-week high, it has a decent yield (2.5%), and the valuation appears attractive: 9.9 times forward earnings. Still, the chart is saying that the stock could be in for further weakness.
Like IBM, Deere is trading below both its 200-day and a major, long-term trendline. But in this case, the chart is sending an even stronger signal due to its series of lower highs. The message: If you’re looking to bottom-fish, look elsewhere.
AT&T (T) offers a comparable valuation profile, but the technical picture argues for caution. Coming off of a potential double-top, its shares have fallen below both their 200-day MA and two-year trendline. AT&T is unlikely to suffer major downside given that its yield is over 5%, but the chart is showing that upside will be limited for the time being:
While the charts of IBM, Deere and AT&T are flashing the red light to investors, several other big-name stocks are also nearing levels that indicate it’s time to set stops to lock in gains. All of these stocks remain in uptrends for now, but all bear watching as summer turns to autumn.
Coca-Cola (KO), which is sitting right at its 200-day and is less than a dollar away from its lower trendline at $38.50, is coming close to worrisome territory — particularly in light of the fact that the stock is trading at a hefty forward P/E of 17.4:
Exxon Mobil (XOM) has weakened after its soft second-quarter earnings report, and yesterday it crossed below its 200-day MA. Alone, a break of the 200-day hasn’t been a reliable signal for XOM, but the stock also is approaching a two-year lower trendline (currently at $88.75) as well as another trendline that dates back to mid-2010 (currently at $86.10). This indicates the stock has little margin for error remaining before it begins to sustain meaningful technical damage.
Walmart (WMT) still has plenty of cushion before it reaches a breakdown point, but it’s close enough that it warrants attention. Those who own the stock, and who have a shorter-term inclination, should consider setting stops where the 200-day and two-year trendline intersect, at roughly $73.70.
With three big names from diverse sectors already having broken down, and three more coming close, is there a message here regarding the broader market?
That doesn’t appear to be the case — the S&P 500 is still far away from either its 200-day or its lower trendlines, as are the mid- and small-cap indices.
For now, then, consider these charts to be a signal for trading these six individual names rather than a signal about overall market conditions.
As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.
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