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Is 3M the swing stock for the Dow Industrials\?

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One stock in the Dow Industrials for bearish traders to be keeping an eye on. Should current market conditions worsen, this stock could lead a downward move.

Minnesota Mining and Mfg. Chart - $2 & $1 box

Back in November (red B) shares of Minnesota Mining and Manufacturing (NYSE:MMM) affectionately known as "3M" broke above bearish resistance trend at the $95 level. The relative strength chart (below) confirms that 3M's move had the stock outperforming other Dow stocks for which it is a component of. Now we're starting to see shares of MMM break upward trend at $108.

Relative Strength Char of MMM vs. Dow Industrials

Traders and investors that look at the relative strength chart of MMM versus the Dow Industrials get a better understanding of how this stock has traded relative to the Dow Industrials. The relative strength chart was flashing buy signals at 88 and again at 92 as the stock gained strength vs the Dow Industrials. Since January however, shares of MMM have basically been trading in line with the Dow Industrials.

Currently, I'm taking a more cautious to bearish outlook for shares of MMM as the stock has broken below upward trending bullish support, given a triple bottom sell signal and has a bearish vertical count of $94 associated with its chart. The stock is losing strength relative to the Dow Industrials (INDU) and hints that some institutions are perhaps rotating out of a stock that had performed well to the upside.

Under current market conditions, a bearish trader might be willing to establish 1/2 position short/put in the stock with a stop at $118.

Traders/investors that are long the underlying shares can be writing some covered calls on their position should they want to play some defense with the stock. At the time of this writing, the MMM Sep 110 calls (MMMIB) are bid $2.85. A trader/investor looking to hedge their position in the event of a broader market decline, could then take some of that premium sold from the calls and buy a protective put in the MMM Oct 100 (MMMVT) that are offered at $2.00. This would be a way to help insure a position until October option expiration, with little or no out of pocket expense.

Dow Industrials Chart - $50 box

The point/figure chart of the Dow Industrials is bearish. It sure looks like investors are willing to sell into the rallies as the INDU continues to set lower highs on every attempt at a reversal higher. A break below the 10,100 level will have many traders targeting the 10,000 level as psychological support. With a bearish price objective from our vertical count indicating the potential of 9,750, we'd be playing some defense for several Dow component stocks.

Jeff Bailey
Senior Market Technician

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