Low-Flying Aflac and Relative Strength

11/06/00 03:09:01 PM

by David Penn

Shares of Aflac Incorporated have managed to advance over 50% since July without suffering dramatic overbought reversals.

Security: AFL
Position: N/A

For those using indicators like the relative strength index (RSI), rising relative strength is often a mixed bag. Sure, seeing your shares rise and the RSI rise along with them provides more comfort than share price appreciation in the shadow of lagging relative strength. But often the RSI ends up taking away much of what it gives, as appreciating shares reach a point of saturation (which the RSI, among other indicators, often points out effectively) known as "overbought" which tends to result in profit-taking and, sometimes, significant losses in share price.

Relative strength then can be a problematic indicator in strongly trending markets in which share prices undergo fairly consistent appreciation. At times, the RSI will suggest that a strongly uptrending market has reached a point of saturation, when in fact buying interest remains heavy and continues to push the stock up. Stocks at or near new highs typically provide relative strength readings that can be difficult to interpret.

Three instances when Aflac broached overbought territory yielded reversals of 14%, 12% and 10% from June to November. But the rally periods were shorter and stronger -- in terms of volume -- each time. Strong investors earned 55% on their money over the same five-month period.

Graphic provided by: StockCharts.com.

Aflac Inc. is an example of a company that has been trending fairly strongly since July, when shares were priced in the mid-40s. Since then, Aflac has appreciated 55% to close in the low 70s by the end of October. While these gains are impressive, the fact that Aflac has gone from about 45 to 70 without any major downside reactions (and this in a market that has had more than its share of major downside reactions of late) is perhaps all the more impressive. From July to November, Aflac has suffered three significant reversals: a 14% decline in mid-June that was recouped by late July, a 12% drop during the second half of August that was recouped within the first two weeks of September, and a 10% drop at the beginning of October, which was recouped by the end of the month.

These minor reversals, in many ways, have helped take some steam out of Aflac's advance--and have kept Aflac from hurtling headfirst into overbought territory and, perhaps, more sizeable reversals. Note that all three of the advances and reactions mentioned above came at times during which Aflac's RSI was approaching or had crossed the 70 overbought mark. In fact, a close look at the RSI for Aflac reveals an almost uncanny ability of the stock to fly beneath the overbought radar, climbing without climbing too high, too fast. This suggests, among other things, that Aflac is largely in strong, knowledgeable hands and is presently less susceptible to the price swings and volatility that often accompany stocks held predominantly in the weaker hands of individual investors.

Aflac is currently skirting overbought territory, and a few bearish trading sessions have put in question the ability of the stock to remain above $70 per share. There is an immediate support level at $68 per share, which represents the most recent peak reached at the beginning of October. If Aflac's price behavior over the past few months is any indication, then a successful rally from the $68 support level should result in advances in November. Failure to remain above 68, especially on strong volume, would set up a major follow-up test at 60, which is both the October low and the next most recent peak reached in August. Should Aflac fall this far, then it is quite possible that the careful stewardship that brought Aflac up 55% in four months may abandon the wheel to the hands of less able--and less confident--drivers.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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