U.S. stocks saw a potentially concerning reversal on Friday. Declines weren’t large — the S&P 500 closed down just 0.29% — but major indices finished the session at the lows.
To be sure, a modest intraday decline doesn’t mean the decade-long bull market is over. All three indices closed Thursday, once again, at new all-time highs, as the easing of tensions in the Middle East brought buyers back into the market.
That said, Friday’s trading adds to the sense that there are some modest concerns at the moment, or at least some risks to watch. Earnings season begins this week. Valuations do look potentially stretched after huge 2019 returns. Domestic political developments could impact sentiment as presidential primaries arrive.
Monday’s big stock charts feature three names for which those external considerations should impact trading going forward. All three stocks have managed to find a bottom in the last few months after pulling back — no surprise in an equity market making new all-time highs. All three charts show that strength can continue if these stocks can dodge some of the same risks that threaten the market as a whole.
UnitedHealth Group (UNH)
Investors bought the dip in UnitedHealth Group (NYSE:UNH), and with good reason. UNH stock has been one of the best performers in the Dow Jones Industrial Average over the past decade. Those who stepped in at early October lows are up nearly 40% since — but the first of Monday’s big stock charts highlights a risk that the rally will stall out:
• UNH stock still sits modestly below December highs. And the narrowing ascending wedge pattern does present a risk of a reversal, particularly with shares threatening to slip out of that wedge. A downside exit would suggest a decline toward moving averages, with the 50-day providing initial support at $280 and the 200-day back down near $250 at the moment.
• Fundamentally, UnitedHealth stock still looks attractive at 18x forward earnings. The longer-term bull case likely holds even just off all-time highs. But competitors are eyeing the company’s market share. And it’s certainly fair to wonder if the looming U.S. presidential election will drive volatility in UNH stock in 2020 — or at least lead some investors to the sidelines until political clarity emerges.
• An investor’s view of UNH, then, might well be driven by her view of the market as a whole. Political risk obviously isn’t limited to UnitedHealth stock: elections could hover over stocks for the next ten months. On the other hand, this has been a market where investors have been rewarded for focusing on quality over valuation and for sticking with winners. If that trend holds, UNH’s rally might have another leg ahead.
CSX Corporation (CSX)
The second of our big stock charts, railroad operator CSX Corporation (NYSE:CSX), also shows a bottom. And there is a technical case for the uptrend to continue:
• CSX stock has exited a triangle pattern to the upside, and sits nicely in the center of an uptrend that has held since late August. Moving averages look like they can provide near-term support. And a bullish golden cross could loom in the coming weeks: if CSX can keep rallying, the 50-day moving average should clear the 200-day.
• Market factors will matter. Railroads are notoriously sensitive to the macroeconomic climate. If the market as a whole sells off, CSX stock likely will as well.
• As a result, CSX stock looks like an intriguing pick for macro bulls. The near-term technical outlook is positive. Valuation is attractive if external factors cooperate. And yet shares actually trade below where they did sixteen months ago. There’s a nice case that CSX stock should be able to catch up with the rest of the market, and even outperform other big railroad stocks like Union Pacific (NYSE:UNP) and Norfolk Southern (NYSE:NSC).
Occidental Petroleum (OXY)
It does look like the third of Monday’s big stock charts has played out. For Occidental Petroleum (NYSE:OXY), trading going forward will depend on whether the stock can break through resistance:
• OXY stock already has made its move. Shares have reversed out of a narrowing descending wedge and cleared moving averages. To be sure, there’s still a lot of ground left to cover: Occidental stock touched a 14-year low last month.
• The catalyst to the downside has been Oxy’s acquisition of Anadarko Petroleum. Occidental, with help from Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B), won a bidding war with Chevron Corporation (NYSE:CVX). But crude oil prices wound up falling sharply, and the leverage used to fund the deal amplified the impact of those declines on OXY stock.
• That history, however, makes OXY somewhat interesting at the moment. West Texas Intermediate crude oil prices actually have recovered most of their losses — but the same isn’t true for the stock. It’s too simple to argue that OXY should return to $60+, but there is a case that shares should retrace more of the losses than they have so far. With a key level around $47 and the 200-day moving average not far above current levels, that case needs to be right. If it is, OXY can bust through resistance and continue its breakout. If not, the third of Monday’s big stock charts may show yet another reversal in the not-too-distant future.
As of this writing, Vince Martin has no positions in any securities mentioned.