Dow Jones stocks go up down, just like everything else. But lately, they’ve been going down a lot more than up, as the Dow Jones Industrials ETF (DIA) has crashed back to prices associated with the August flash crash.
Plunging oil prices and concerns regarding a flailing or failing China, as well as the daily Fed tap dance and our own tethered economic concerns have been the primary culprits putting worry lines on investors in most Dow Jones stocks these days.
But with virtual blood on the streets right now, it’s a horrible time to sell if you’re just waking up to the idea. Short-term, even if you’re a turncoat bear, the market is very, very oversold and due for some bullish, reversion to the mean price action in many and most Dow Jones stocks.
Having said that, let’s explore three Dow Jones stocks for “diamond in the rough” opportunities based on a combination of price charts, business prospects and limited-risk positioning available from the options market.
Dow Jones Stocks With Upside: Microsoft (MSFT)
Did the market just crash? Apparently tech giant Microsoft (MSFT) didn’t get the memo when the rest of the Dow Jones stocks did.
Sure, MSFT stock still didn’t quite top its 1999-2000 highs in 2015, but its price chart has been demonstrating much greater resilience than most of its tech and Dow Jones peers.
Much of the support for MSFT stock is tied to a leaner, meaner and more diverse business model at Microsoft that began coming into its own during 2015.
Technically speaking, the latest sign of a stronger “Mr. Softy” emerging as we move forward into 2016 is MSFT stock’s ability to hold key breakout support from a prior, massive pattern base. The provided weekly view shows a possible hammer low forming off a test of MSFT’s October breakout from a year-long double-bottom base breakout.
What’s also impressive is MSFT stock’s relative strength compared to most other Dow Jones stocks.
Shares of Microsoft are trading well above their August flash crash lows — not to mention other, lower price/time benchmarks being precariously tested by many other Dow Jones stocks right now.
Looking at MSFT stock’s options board, and with the company reporting next Thursday night, I like the February $52.50 / $55 bull call spread for 80 cents or better as a smart way to position in this Dow Jones stock.
The limited-risk MSFT vertical spread provides a max return in excess of 200% above $55, with a holding period of just one month. The bullish spread also cuts down directional, time and volatility risks, just in case this period’s earnings report falls short of October’s well-received profit beat.
Dow Jones Stocks With Upside: DuPont (DD)
Investors were absolutely enthralled initially with DuPont’s (DD) “merger of equals” agreement with fellow materials giant Dow Chemicals (DOW) back in December as shares of both companies jumped higher by about 11%.
But investor applause for DD stock and an estimated $3 billion in synergies enabling stronger focus and profitability have nonetheless been tossed aside as DD got punished with the rest of the Dow Jones stocks.
The good news is that investor backlash in DD could be over. The current deep pullback in DD stock is setting up as a higher-low double-bottom.
Supporting the reversal in this Dow Jones stock, Thursday’s price action established a bullish doji candlestick pattern in shares of DD. The daily chart reversal pattern has also filled a bullish, “buy the news” gap from early October.
Checking DD stock’s options board and given the focus on the importance of the daily chart low, as well as earnings next Tuesday, I like the Weekly January 29 $53.50/$55 bull call spread for 50 cents or less.
The DD spread offers a return of up to 200% in just over a week’s time if DD can close up by about 4% by next Friday. Given an extremely oversold Dow Jones and earnings as a potential catalyst in DuPont stock, that certainly seems plausible.
Note: Markets in DD options are relatively thin and this spread has been priced a few pennies below fair value based on the natural bid/ask market.
Dow Jones Stocks With Upside: Walmart (WMT)
Walmart (WMT) has dug itself into a deeper hole than most Dow Jones stocks. Shares of WMT trended aggressively lower during 2015 on items like disappointing quarterly results, lower guidance and failure to compete effectively against an increasingly dominant Amazon (AMZN).
Management has taken the downturn to heart and begun its strategy of taking back market share, intent on making Walmart more competitive.
It’s not a quick or painless remedy for the Dow Jones constituent, but WMT stock is on the discount rack, technically speaking, and appears to have found key monthly chart support. WMT stock has tested longstanding congestion and ascending support lines following its drop of 38% from early 2015’s all-time-highs.
What’s more, since scoring its low near $57.50 in WMT back in November, this Dow Jones stock appears to be setting up in a new uptrend.
On the lesser daily and weekly chart time frames, WMT has established a couple of higher highs, and its current pivot low is finding support from the 50-day simple moving average.
Reviewing Walmart’s options board, the WMT March $62.50 call for up to $1.75 is attractive.
Granted, premiums are expensive right now. But with an oversold rally likely to develop in the Dow Jones and WMT stock, this long call strategy offers a solid risk-to-reward setup for positioning.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT