Forward With Pfizer?

08/28/07 03:57:15 PM

by David Penn

A positive divergence sets shares of Pfizer up for a test of resistance at the 50-day exponential moving average.

Security: PFE
Position: N/A

I usually don't spend a lot of time looking at individual stocks. But looking at the meltdown in the Dow Jones industrials this morning (that's August 28, 2007) got me wondering if there were any Dow stocks that looked in halfway decent technical shape. My bias was that the market might test the lows of mid-August, but those lows would hold up. The idea then would be to look for stocks that had been in downtrends going into the August lows, for which the August lows could represent a more enduring bottom.

The only candidate out of the Dow Jones industrials that I found was Pfizer (PFE). Pfizer, a consumer staples stock, topped out in May just south of 27.50, and by mid-August it was trading at about 23.50. (See Figure 1.)

FIGURE 1: PFIZER, DAILY. Positive divergences in both the stochastic and the MACD histogram indicate a bottom in Pfizer after months of declines. Note the size of the MACD histogram in the second half of August. A peak that size in this context is generally indicative of higher prices. With the stochastic breaking out into overbought territory, a close above the recent highs will likely embolden Pfizer bulls.

Graphic provided by: eSignal.

However, it was in mid-August that Pfizer made a lower low that was not confirmed by either the MACD histogram or the stochastic -- both of which made higher lows. This, combined with the 2B bottom created when there was no follow-through to the downside after the doji on Pfizer's lower low, built a strong case for a bounce, at minimum, in the market for Pfizer. See Figure 2.

FIGURE 2: PFIZER, DAILY. This 2B bottom in the market for shares of Pfizer helped traders anticipate an end to the multimonth correction in the stock. The pattern was confirmed just one day after developing, in a gap up session that closed just south of 24.

Graphic provided by: eSignal.

Pfizer responded in the second half of August. The stock moved up, breaking out above potential resistance at the 24.50 level, only to find more serious resistance at the 50-day exponential moving average.

Pfizer has spent the past few days moving sideways in a tight range. Even so, the stock gave an overbought, BOSO buy signal on August 24 that will be confirmed with a daily close above 24.83. I have found BOSO buy signals that arrive in the wake of positive divergences to be among the most worthwhile signals from this particular use of the stochastic (see my Traders.com Advantage article, "BOSO And The S&P 500 Breakout," from April 20, 2007). Also impressive from the bullish side of the analysis is the size of the moving average convergence/divergence (MACD) histogram in late August, which rivals any histogram peak in the past year. This is another clue I have written about frequently, and one that can compliment and help confirm analysis from other methods -- such as the positive divergence in the MACD histogram and stochastic, and the BOSO overbought breakout.

David Penn

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

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