Shares of diversified chemical company Dow Chemical Co (DOW) bumped a little higher in Wednesday’s trading on the back of a couple of news items that hit the wire. From a technical perspective, however, DOW stock still is struggling to overcome a major confluence resistance area. And the entire materials sector of the S&P 500 — to which the stock belongs — also has yet to push to new highs.
Active traders and investors could look for confirmation of this relative weakness in DOW stock to be confirmed on the next down-day, and thus have a very defined-risk trade setting up to the short side.
The big news Wednesday was that Dow Chemical announced new stock buybacks and a higher dividend. Dow announced it would tack on $5 billion to its repurchase plan for a total of $9.5 billion, and it also raised its dividend by 14%, from 37 cents per share to 42 cents per share.
Furthermore, DOW entered into a definitive agreement to sell its Angus Chemical Company to Golden Gate Capital for $1.215 billion.
DOW Stock Charts
Looking at DOW stock’s multiyear weekly chart, we note that its 2009 uptrend remains intact. When the stock topped in September, it had retested its 2005 highs and became increasingly extended above its black support line. At the same time, while the stock continued to rise into September, upside momentum — as represented by the Relative Strength Index (RSI) — had already topped in February and then formed a series of lower highs.
This multimonth negative divergence between price and momentum ultimately weighed on the stock price in the second part of September and early October as the stock was sold off along with the broader market.
The September/October dip didn’t quite mean-revert to the 2009 uptrend line, which still leaves it vulnerable for one more selloff in the bigger picture before ultimately resuming higher in the secular bull market.
On the daily chart, the selling in September/October in DOW stock was vicious, which considering its steep slope also left it vulnerable to a sharp snapback. Unlike the broader market and many of the sectors, however, DOW has not moved to new highs but rather is finding good resistance at a confluence area made up of a horizontal resistance line (former support), and its 50-, 100- and 200-day simple moving averages (yellow, blue, and red lines, respectively). On Wednesday, DOW stock reversed lower intraday and left behind on the daily chart a bearish shooting star candle.
While this is not yet a signal to short the stock, any follow-through selling in coming days would confirm Wednesday’s intraday highs near $51 as important. This would then set up a short-side trade against this level, with a first downside target near $46.50.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities
