by Serge Berger | January 22, 2014 8:12 am
Dow Chemical (DOW), the diversified chemicals company and S&P 500 component, enjoyed a big rally Tuesday that pushed DOW stock to fresh multiyear highs.
The culprit for Tuesday’s rally was the announcement that Daniel Loeb — the activist investor and hedge fund billionaire of Third Point LLC — took a stake in DOW stock. The investment in DOW stock is currently Third Point’s largest.
Loeb is calling for a spinoff of Dow’s petrochemicals business, which in his eyes would improve the company’s profitability. He’s also asking DOW to consider a big share buyback that would in essence help to offset a convertible bond deal whereby Berkshire Hathaway (BRK.B) and the Kuwait Investment Authority will get issued a large amount of stock.
As a result of the news, DOW stock rallied an impressive 6.6% on the day, on a big spike in volume.
Tuesday’s rally also confirmed an important breakout on the stock’s longer-term chart, looking back to 2005. A diagonal resistance line (black) again came into play for DOW stock back in October, when after a two-and-a-half-year slump it had once again worked itself back up.
I often discuss that the longer a a resistance/support area remains, the more powerful the eventual break through it. In the case of DOW stock, it finally managed to break past this resistance point in December. But as those big levels usually don’t give easily, the stock then retested the breakout point, and with Tuesday’s rally confirmed the December breakout on the weekly chart. This almost textbook price action, through a technical lens, now opens up DOW stock toward the $50s.
The daily chart reveals an equally bullish picture, whereby we see a stock that respects its various lateral support levels and moving averages.
In December, Dow Chemical found lateral support and its 100-day moving average (blue) near $38.50, which led to the break past the October highs. After some consolidation in late December and early January, DOW stock then found good lateral support at the October highs (i.e., previous resistance), which also roughly coincided with the 50-day simple moving average (yellow).
Tuesday’s rally came right out of the gate, as Dow Chemical gapped higher and never looked back.
From here, with constructive price action in all time frames, coupled with support from a big activist investor, the stock looks set to move higher into the low to mid-$50s, as mentioned above on the weekly chart.
Despite the good positioning of the stock, traders and investors would be wise to circle next Wednesday, Jan. 29, on their calendars, when Dow Chemical is scheduled to report earnings.
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Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the Essence of Swing Trading e-book by clicking here. As of this writing, he did not hold a position in any of the aforementioned securities.
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