The stock market continues its slow grind higher, but we’re starting to see an increasing amount of concerning divergences within stocks and across asset classes. In my 17 years of trading experience, I have learned that such environments lend well to healthy cash positions in one’s portfolio and looking out for stocks that have a more defensive tilt and relative strength.
Shares of Sherwin-Williams Co (NYSE:SHW), a maker of paint and coating products, currently fits the bill.
When Sherwin-Williams reported its latest earnings in mid-April, SHW stock came under some selling pressure — but pressure that also coincided with a decline in housing stocks, to which Sherwin-Williams is correlated.
However, the much-better-than-expected housing starts and building permits data on Tuesday unsurprisingly lifted the housing sector and further confirmed the better stream of data we have seen all year — and that’s constructive news for a company like Sherwin-Williams.
SHW Stock Charts
Moving on to the technical picture, we see that SHW stock has steadily and steeply moved higher since 2011. However, Sherwin-Williams began moving higher in too quick a pace off last October’s lows, which led to a break above the multiyear channel (black parallels).
Such moves typically lead to a mean-reversion move lower and back into the channel; however, in some circumstances, a stock will begin to consolidate sideways, thus working off the overbought levels and ultimately continuing higher.
This is exactly what has taken place in SHW stock, and thus shows resiliency that points to the stock resolving higher still.
If we zoom in on the daily chart, we see that the the sideways consolidation phase in SHW stock since February has allowed the moving averages to to catch up with price. At the early May lows, Sherwin-Williams bounced right off its 100-day simple moving average. On Tuesday, the stock marginally peaked and closed above its year-to-date horizontal line of resistance around the $292 area, but so far, we haven’t gotten a better breakout move.
The price action in both the shorter and longer terms continues to be both constructive and impressive. That should support SHW stock in any bouts of weakness coming from the broader market this summer and into the early autumn months.
Active traders and investors could look to buy SHW at current levels for a move into the $305 area, while more tactical investors would want to buy any pullbacks in the stock toward the $280 area for better risk/reward proposition on the long side.
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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.
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