The Shampoo Rocket Ship J&J Hits Turbulence

by Tyler Craig | May 28, 2013 10:45 am

Johnson & Johnson (JNJ[1]) has been something of an enigma.

As if it was hit with a sudden bout of amnesia once 2013 began, it apparently forgot how to drop in value for 20 conseuctive weeks. And yet, as we will soon discover, the magic might finally be wearing off.

While it possesses the DNA of a staid, dividend-paying consumer staple stock, JNJ has been acting more like a momentum tech stock on fire lately. What’s so impressive about its sudden takeoff and parabolic trajectory is the fact that for the past decade, Johnson & Johnson stock has remained stuck in a box between $50 and $70. And yet, here we are a short five months after it busted out of its trading range, and it already has skyrocketed the distance of the prior decade’s entire range — $20.

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Interestingly, JNJ finally encountered enough turbulence to end its breathtaking streak. After beginning last week with yet another multiday rally, a wicked intraday bearish reversal Wednesday — followed by continued downside through Thursday and Friday — proved too much to keep the stock in the green.

On a side note, the appearance of last week’s bearish reversal candle illustrates an embedded advantage to technical analysis. Far from being a foolproof forecasting method, technical analysis provides a quick and easy way to identify a change in character. Rather than discovering such a shift buried deep in the details of a company’s balance sheet, we find it loudly broadcast on a price chart for all the world to see.

While the formation of a single bearish candlestick doesn’t portend imminent doom for JNJ, it does at least provide evidence that an underlying shift is likely afoot in the momentum of the stock. Whether it experiences a deep correction or merely some sideways chop, last week’s candle gives reason for JNJ shareholders to take defensive measures after such a favorable few months.

One of the simplest ways to protect the recent gains in JNJ is purchasing a put option. For example, you could buy the August 87.50 put for $2.

Think of it this way — for a mere 10% of the gains you’ve racked up this year, you can lock in the right to sell your shares at $87.50. That’s pretty cheap insurance. Plus, if JNJ continues to rise, you will rack up additional gains. So the purchase of the put doesn’t cut off your access to additional profit accumulation — it merely requires you to pony up a small amount of money for the peace of mind that you’re protected if the stock craters.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

  1. JNJ:

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