The S&P 500 is preparing to form one of the more widely recognized bullish technical analysis patterns — a golden cross. This pattern is formed when the S&P 500’s 50-day moving average crosses above its 200-day.
From a technical analysis perspective, a golden cross signals that the intermediate-term market trends are improving after a period of lower prices and, usually, increased volatility.
While we like the fact that the S&P is preparing for this potentially bullish pattern, we always like to maintain our eye on individual stocks that are forming their own golden cross patterns, as they often provide opportunities to profit from a strengthening trend.
A scan of our technical database generated a list of 49 companies that have seen a golden cross formation over the last two weeks. After running this list through our model, the following three were bullish standouts.
Golden Cross Standouts: Quest Diagnostics Inc (DGX)
Healthcare stocks of all sorts are making headway again after a couple of rough quarters, and Quest Diagnostics Inc (DGX) has upheld a relative strength leadership role among the healthcare sector and against the S&P 500 as its charts continue strengthening.
That strength led to a golden cross about a week ago, as DGX made its way to the $74 mark for the first time since July 2015. Looking back, the last time that Quest Diagnostics shares completed a golden cross was in May 2014, just before embarking on a long-term bull run.
In addition to the technical strength, Quest is classified by our models as being a smart contrarian trade, as short interest and analyst recommendations point to very bearish sentiment toward the stock. We expect sentiment to shift as the bears warm-up to this market leader, helping it to surge higher.
Golden Cross Standouts: Caterpillar Inc. (CAT)
Industrial stocks like Caterpillar Inc. (CAT) have been rock stars as of late. That’s thanks to recent economic data, which remains more resilient than investors and analysts expected. While there are some economy warning signs popping up every now and then, the market has been discounting an improved economic outlook.
Caterpillar stock has rallied more than 30% over the last three months as the S&P 500 has improved by 12%. The rally resulted in its first golden cross technical pattern since December 2013. At that time, the stock was trading at $87, and the rally drove it over $110 in eight months.
Caterpillar stock is among the more underloved industrial stocks, with only 4% of the Wall Street analysts covering the stock recommending it as a buy. In addition, short sellers have remained bearish on Caterpillar stock, as short interest remains near its highest level over the past two years.
We expect the technical strength to force analysts to upgrade and create a short squeeze that will maintain the stock’s current trajectory to a target of $90.
Golden Cross Standouts: The Western Union Company (WU)
The Western Union Company (WU) is considered an information technology stock, but WU is best known for its financial services. The stock just completed a golden cross last week on its rally to the $20 level.
The company has beat on the top and bottom line for the last four quarters, a feat that puts it in a small class of stocks. In addition Western Union has travelled in line with guidance over the same period.
The fundamental positives have gone unnoticed, as only 19% of the analyst community tracking the stock have it ranked it a “buy.” The fact that WU stock is still trading 27% off of its all-time high supports the argument for low analyst rankings, but we’re expecting a continuation in Western Union’s trend to warrant some bullish upgrades.
Finally, the short interest ratio for Western Union stock weighs in at 13.2, putting it high on the list of stocks that are likely to see a short covering rally on a move higher. The better-than-expected earnings results among financial and related stocks may help to trigger this covering rally and a move toward the $24 price.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
