Lately, shares of General Electric (NYSE:GE) and their slow decline sure seems to be having a negative impact on the Dow Industrials. Today's trading in most stocks is rather lackluster and that gives traders some time to be doing some homework and taking a look at different stocks to be building a prospect list.
One indicator I like to use is relative strength. A trader wanting to better understand General Electrics (GE) strength could compare shares of GE against the Dow Industrials. Recently, the point and figure chart of GE gave a "bearish triangle" pattern when the stock traded $47, but the stock remains above bullish support (upward trend) at $42. This can give the trader mixed observations. While the trend is bullish, the pattern was bearish. Perhaps relative strength gives some insight as to how GE is performing relative to the Dow Industrials. GE is a component of the Dow Industrials and current status there shows that the stock has been outperforming the Dow over the longer-term. However, we can calculate relative strength of a stock and chart it on a daily basis if need be.
The above chart is how GE is performing relative to the Dow Industrials. Much like all point and figure charts, buy and sell signals are easily understood. With the relative strength chart still in a column of X's, we understand that GE is still strong relative to the Dow. To calculate relative strength, the price of the stock you want to measure is divided by the index you are comparing it too. Right now for example, GE is trading at $45.66 and the Dow Industrials are at 10,486. Therefore, we would calculate a relative strength value of 0.00435. We would take that value and multiply it by 1,000 to get a chartable value of 4.35. A chartist using the 3-box reversal method of charting would not be able to put relative strength in a column of O's until this stock's relative strength equaled 4.0. When building a candidate list of bullish or bearish plays, try to ascertain the relative strength of a stock. Often times a stock that remains strong even in a declining market will often times outperform to the upside in an advancing market. Stocks that have been weak relative to the market in an upward move, often times outperform to the downside when the markets weaken.
You can get free relative strength charts at www.stockcharts.com. Just pull up a point and figure chart of the stock you are interested in, then scroll down the page and click the "Show Relative Strength vs." button underneath the chart.
Right now, I'm watching GE and currently have a somewhat mixed opinion on the chart. The technicals look weak and a break below the $44.50 level could have the Dow Industrials under selling pressure. This could also dampen market psychology should the Dow Continue to weaken further.
After receiving an upgrade from Merrill Lynch, shares of McDonalds (NYSE:MCD) are up 62 cents.
McDonalds Daily Chart
The stock had been up over $1 earlier, but has since sold off. That's because it was met by three points of resistance. The 50- dma, 38.2% retracement level, and big red downtrend all converged to quash any positive news from Merrill. If that can be broken, perhaps, just perhaps, MCD would be an extra value meal.
Wendy's Daily Chart
Wendy's (NYSE:WEN) had been consolidating between $24 and $26 for the better part of two months. Eight days ago started a run that broke the stock out of its the trading range. WEN then stalled at $27 for three days, before resuming its up trend today. But volume has been less than impressive over the past few days. That was okay while the stock was consolidating, but I would have like to see a little more volume on today's breakout. This makes me think the stock is more likely to pull back to $27, than continue its up trend. Fast food stocks need a couple of follow through days before I would consider buying them. Of course I will continue to buy their artery clogging products. Which will climb faster, their stock price or my cholesterol? I wouldn't short my cholesterol level any time soon. Clear!