EDITOR’S NOTE: Serge Berger is taking a break today, but will return Wednesday, Feb. 3.
With just a quick glance, Dow Chemical Co. (NYSE:DOW) looks like it’s unable to get any traction, doing little more than bouncing around in a narrow range since finally finding a bottom after December’s sharp pullback.
When one takes a step back and views DOW stock from a bigger-picture trading perspective, however, it turns out there may be a constructive — and bullish — method to the madness.
Last Thursday, Dow Chemical posted fourth-quarter income of 85 cents per share of DOW stock, trouncing estimates of 69 cents per share, unfazed by falling oil prices that seem to have adversely impacted other chemical companies.
Given the weakness of shares leading up to the news, to say the market was a little stunned by the significant beat might be an understatement. Yes, shares edged a little higher on that news, but they have yet to make a move commensurate with the encouraging results. That delay, however, may well play into the hands of traders who prefer not to chase knee-jerk reactions to news.
How so? Despite the lack of immediate news, the Dow stock chart has been setting up a base for a turnaround effort over the past four weeks. One more nudge could put the budding effort into motion.
DOW Stock Charts
Not too many stocks have been rewarding to own since September, but Dow Chemical shares have been particularly painful to hold during that timeframe. But the bleeding has stopped and the bulls have regrouped exactly where they should have, suggesting the recent perk-up is a true hint of a turnaround.
There are two sets of Fibonacci retracement lines on the weekly chart below. One’s red, and the other is blue. Both use the September peak at $54 as the upper end of the range in question, though they each have their own starting points. The bigger, longer-term one (red) starts the proverbial clock at 2010’s and 2011’s lows if just under $20, while the other is based at the lows near $25.80 seen in 2012.
In any case, we’ve seen near-perfect 38.2% retracements of both sets of Fibonacci lines — the first one was October’s dip to a low at the 38.2% retracement level of the bigger (red) set of lines spanning $20 and $54, and the second was the December/January low that was relatively in line with the 38.2% retracement level (blue) of the $25.80/$54.00 span.
Point being, the recent regroup and consolidation at the $43 isn’t a mere coincidence. Neither is the low near $41 in December. These prices were primed to be organic reversal levels.
Zooming into a daily chart of Dow Chemical, we can get a better feel for how DOW stock is starting work its way out of a short-term consolidation phase and testing the waters of higher highs. At this point it’s yet to dish out a strong thrusting move, but it’s in position to do so.
A move above the (very) recent ceiling at $45.70 would be modestly convincing evidence of a breakout effort, while a move beyond the 50-day moving average (purple) would be a considerably convincing clue of the same here in the shadow of a push off of a modestly rising support line that tags three of the last four major lows.
The scenario is one of very modest risk relative to the reward. The rising floor currently at $43 would also make for an ideal exit point in the event any pullback spins out of control. Meanwhile, DOW stock isn’t poised to hit a major headwind until revisiting last year’s repeat highs near $53.50 (green).
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
