By Larry Benedict, editor, Trading With Larry Benedict
While some large-cap companies rallied strongly at the start of this year, another market giant was heading south…
Shares in Johnson & Johnson (JNJ) fell 17% from early January to late March.
It gapped higher and showed promising signs of an emerging rally in April. But then JNJ rolled over again…
From there, declining buying momentum caused JNJ to steadily fall.
Yet it recently built a short-term base. And now JNJ shares are again trying to rally.
That rally is about to test a key resistance level. So today I want to see how things might play out…
A Stalled Up-Move
On the chart below, you can see how JNJ rallied into the end of last year.
That rally petered out and reversed, though. And JNJ broke into a downtrend early this year…
Johnson & Johnson (JNJ)
Source: e-Signal
That transition coincided with two bearish signals…
While JNJ was trending higher (upper red line), the Relative Strength Index (RSI) was descending (lower red line).
When momentum falls like this, it will eventually pull the stock price down too.
JNJ’s fall then accelerated when the RSI broke down through support (green line).
Then the 10-day Moving Average (MA, red line) crossed below the 50-day MA (blue line), and both tracked lower. This added further confirmation of JNJ’s down move.
That move faded out, though, with a reversal of the previous pattern…
This time, the RSI and stock price converging (orange lines) allowed JNJ to find a base to rally.
As I mentioned above, declining buying momentum will cause a rally to stall.
If that downward momentum continues, then the stock will steadily fall.
However, if downward momentum flattens out (lower orange line), then the declining selling pressure enables the stock to find a base.
That’s how it played out here.
JNJ began to rally as the RSI tracked higher and broke up through resistance…
But although this rally initially looked promising, the up-move stalled. The RSI rose into overbought territory (upper grey dashed line) at ‘A.’
Take another look:
Johnson & Johnson (JNJ)
Source: e-Signal
JNJ’s fall coincided with the RSI flipping over and tracking lower right across its band…
Yet JNJ found a base at ‘B’ when the RSI formed a ‘V’ and rebounded from oversold territory (lower grey dashed line).
So with the RSI now tracking right up against resistance, the strength of JNJ’s rally is about to be tested.
What can we expect from here?
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Need a Decisive Move
For JNJ to maintain its emerging rally, it will first need to break through resistance and gain traction in the upper half of its range.
The longer the RSI can remain in this upper band, then the longer any potential rally could be…
We would then look for the 10-day MA to break back above the 50-day MA and accelerate higher as confirmation of any up-move.
The next test for JNJ would be to take out its April 6 high ($167.23).
Yet right now, the most important action lies with the RSI…
If the RSI fails to decisively break through resistance and instead meanders sideways or drifts lower, then the likelihood of a sustained rally from JNJ will be over for the time being.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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