U.S. equity investors can breathe a little easier after a solid performance on Wednesday. After three sessions of declines, major market indices all rose at least half a percent. Combined with strength in the second half of Tuesday’s trading, a broad sell-off seems averted for the time being.
To be sure, risks persist. A trade war resolution remains distant. U.S. economic growth has slowed. A contentious impeachment process could roil consumer and business spending in 2020. But the strength in the last session and a half of trading after a relatively minor dip suggests that a significant, swift, broad reversal is unlikely before year-end.
Thursday’s big stock charts feature names for which that is not the case. All three stocks are either in the midst of a potential reversal or on the cusp of one. In two cases, that’s good news; in another, it suggests investors should consider taking profits.
Diamondback Energy (FANG)
For Diamondback Energy (NYSE:FANG), the reversal already has begun after shares touched a four-year low last month. But the first of Thursday’s big stock charts suggests a real chance of that reversal continuing into a breakout:
- Trading in FANG stock has created an obvious descending narrowing wedge: a classic reversal pattern. Wednesday’s strength cleared the 20-day moving average, with the 50DMA up next. If FANG can continue the rally and exit the top of the wedge, the reversal would be confirmed. And from there, there’s a technical path to the 200DMA in the mid-$90s.
- That said, rallies in recent months generally have failed. Lower oil prices have pressured the entire energy sector. The bidding war for Anadarko Petroleum between Chevron (NYSE:CVX) and Occidental Petroleum (NYSE:OXY) sparked optimism of more acquisitions of U.S. shale producers. Diamondback itself was floated as a potential target. Instead, the sector has struggled, and so has FANG stock. It’s still possible that the gains in recent sessions are another “dead cat bounce.”
- Still, there’s an attractive chart here that is set up for a breakout. Valuation is more than reasonable, with a 9x forward earnings multiple below even other depressed shale stocks. Timing the bottom in energy has been dangerous in recent years, but Diamondback Energy stock looks like it’s worth taking that risk.
Mondelez International (MDLZ)
After over three years of sideways trading, snack and cookie manufacturer Mondelez International (NASDAQ:MDLZ) finally broke out this year. The rally has stalled out, but the second of our big stock charts suggests a move is on the way:
- The MDLZ chart has a number of moving parts, but seems to lean potentially bearish, particularly if the recent modest bounce fades. There’s a declining triangle that can lead to a downside reversal after the recent bounce. The broader trend from September highs is negative. The 20-day moving average serves as potential resistance, and there’s a near-term possibility of a so-called “death cross” if the 50DMA crosses the 200DMA.
- That said, there’s a bullish interpretation as well. If the rally continues out of the uptrend, there’s a path for MDLZ to break out. And support has held on multiple occasions at $52. That support has to hold to avoid a potentially significant decline, but if it does, MDLZ could re-test this summer’s highs.
- Whatever the move, trading in MDLZ is worth watching. Consumer packaged goods stocks have done well this year. Kellogg (NYSE:K) hit a 52-week high this week. General Mills (NYSE:GIS) have rallied. Even struggling Kraft Heinz (NASDAQ:KHC), created by a merger after Kraft Foods was spun off from Mondelez in 2012, has posted a nice bounce. But MDLZ stock is one of the more dearly-valued names in the sector, at 20x forward earnings. If investors are willing to keep paying that multiple — or move shares higher — that might be a bullish signal for the entire sector. If not, however, the end of the rally in Mondelez stock might signal weakness elsewhere.
Varian Medical Systems (VAR)
The obvious question in the third of Thursday’s big stock charts, Varian Medical Systems (NYSE:VAR), is whether resistance will hold again. There are some signs to suggest it might:
- The rally from September lows admittedly has been impressive: VAR stock has risen over 30%. Volume has been solid as well. Shares broke out of a sideways triangle and are well clear of moving averages. The only impediment on the chart is resistance that held earlier this year.
- That said, there’s a question as to whether the breakout has enough steam left at this point. The Relative Strength Index sits above 80 at the moment, which suggests an overbought condition. Fiscal fourth quarter results in November were solid, but as the quick fade on the chart shows, perhaps not quite as impressive as the recent gains suggest. The average Wall Street price target sits at $141, just above past highs.
- If VAR stock does pull back again, there’s an intriguing fundamental case. The oncology equipment manufacturer is showing strong growth: the midpoint of fiscal 2020 adjusted earnings per share guidance suggests 16% year-over-year growth. A 26x multiple to the midpoint doesn’t seem onerous in that context. Those fundamentals might be enough to support a breakout; but if they aren’t, VAR stock might look quite attractive on the dip.
As of this writing, Vince Martin has no positions in any securities mentioned.
