Last Friday both the Dow Jones Transportation index and the Russell 2000 index (among others) jumped to new highs. With broader markets in significantly overbought conditions, if you’re searching for high-probability setups the long side is simply too rich here. Thus I continue scanning the tape for quick short-side plays until such time the market has worked off some of these near-term overbought conditions.
Industrial company Honeywell International Inc. (NYSE:HON), along with the broader market has rallied strongly thus far in January 2013, taking the stock to levels last seen in 1999. From a longer-term perspective, the stock broke a significant area of resistance to the upside in December 2012, which also served as a launching pad for the stock’s most recent vertical ascent. The ever steepening slope off the stock’s lows in June 2012 should concern investors in the near-term as the stock simply has rallied too far too soon.
On the daily chart it also becomes apparent how far (almost 15%) above its 200 day simple moving average (red line) the stock currently floats. A mean-reversion move a little closer down to the moving average should not be too far away. From a momentum point of view of course the stock too is much extended, although as I state often, in trending tapes the momentum oscillators do not offer us very useful signals.
More importantly, the stock’s recent vertical leap is now being challenged by two bearish candlesticks. On Thursday Jan. 24, the day before the company’s latest earnings report, the stock left a shooting star (long tail above its head) behind on the daily chart. The following day, after news of the earnings was out, the stock opened higher but failed to remain there as it sold off to close not far from the previous day’s closing price. In other words, buyers in the near-term seem exhausted here and a high probability short-side play is setting up.
As a comparison, United Technologies (NYSE:UTX), which has also has rallied strongly in recent weeks and months and looks very extended, has not yet flashed any weak candlestick patterns to sink our teeth in to. Thus HON offers traders better risk/reward with a confirmed near-term sell signal.
Recommendation: Last Friday’s highs of $69.25 are a logical area to place stops for shorting HON, while 5% below $67.95 (Friday’s closing price) may serve as a good profit target.