JNJ Technical Analysis

In my previous posts I have examined various fundamental and valuation metrics for Johnson & Johnson using historical data over a 10-year time span. From these analyses, JNJ was awarded 3 of 3 stars in the fundamentals section for having an average RoE of greater than 20% over the last 10 years, a dividend yield and dividend growth rate that should provide more income than a comparable investment in long corporate bonds over 20 years, and for having a well covered dividend and strong balance sheet. JNJ was also awarded 1 star in the valuation section for currently trading below my entry price.

As the stock is trading below my buy price, has performed well in the past (based on fundamentals) and has an adequate expectation of return in the future, I am interested in determining an appropriate entry time for the stock.

52-Week Prices:

One of the simplest screens for an appropriate entry point is the price that a stock is currently trading at when compared to their 52-week high and 52-week low. For reference, the 52-week prices for JNJ are presented below (click to enlarge).

From the chart it can be seen that the stock has fluctuated from a low of approximately $57 to a high of approximately $66 throughout the past year. Relative to the closing price of $63.84 on October 26th, JNJ is trading the following distance from its 52-week high and low:

Price % from value
52-Week High $66.20 3.6%
52-Week Low $56.86 12.2%

To conform to the ‘buy low, sell high’ adage, as JNJ is trading within 5% of its 52-week high, and is greater than 10% from its 52-week low, no stars are awarded for this timing metric.

RSI

In addition to the simple screen based on 52-week highs and lows, I also track the 7-day, 7-week, and 7-month Relative Strength Indicator (RSI) values for each stock I follow. RSI is a momentum indicator that shows when stocks are overbought or oversold. When a stock is oversold on all three time frames (RSI < 30), that typically indicates a good time to buy. Similarly, when a stock is overbought (RSI > 70), that can indicate a good time to sell. The three RSI values for JNJ are currently as follows:

Value
RSI-7d 61.1
RSI-7w 79.1
RSI-7m 66.1

With all RSI values relatively high on the index, and the 7-week RSI value in overbought territory, no stars are awarded for this timing metric. A plot of the 7-week RSI indicator for the last year is shown below (lower chart) along with the price movement (upper chart) and a MACD chart (middle chart). Note how the indicator forecast the last good entry point earlier this year as it was flashing oversold at that time.

MACD

To supplement the RSI calculation, I also examine the Moving Average Convergence Divergence (MACD) indictor. From the above chart of the one year MACD(12,26,9) it can be seen that JNJ is currently in an uptrend with the short-term moving average above the long term moving average. Additionally, JNJ is currently above the signal line. However, as can be seen from the histogram, the uptrend is slowing and a signal line cross may occur shortly. If this cross is confirmed with the RSI-7w indicator and holds for a few days, it would indicate a good time to reduce holdings or to become aggressive in selling covered calls.

Examining the MACD chart, a good entry point was signaled earlier this year first with a signal line cross (blue line crossing the red line) and then by a zero crossing. This would have confirmed the buy signal from the RSI indicators as they were recovering from oversold conditions during this time.

At the current time, based on both an oversold RSI indicator and a MACD chart showing a decelerating uptrend, JNJ earns no stars for timing based on these technical charts.

Summary

Overall, JNJ earned a total of 4 stars (out of 6) which gives JNJ a ‘Buy’ rating. However, based on the technical analysis above, even though JNJ is trading at a discount to its calculated fair value and has good fundamentals, it may not be a good time to add to or initiate a position in this stock. Instead, by patiently waiting for a better entry signal (close near 52-week low, oversold conditions, etc.) investors may be able to obtain a lower price which will increase the investment’s margin of safety.

In my next post, I will outline some options strategies that can be employed with JNJ to generate additional income from the stock and take advantage of the various technical indicators outlined above.

Until next time,
Nathan @ EngineeringIncome.com

Disclaimer:

The data and opinions presented above are for educational purposes only and should not be construed as individualized investment advice or as a recommendation to buy or sell the securities in question. The investing methodology outlined on this site assumes that a stock will perform in the future as it has in the past. This is generally not true. It is the responsibility of individuals to perform their own due diligence and/or consult their investment adviser to determine the suitability of any given investment product for their specific situation. For more information, please see my disclaimer.

Full Disclosure: Long JNJ at the time of this writing.



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