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Trade Johnson and Johnson Stock to New Highs

Nicolas Chahine

I am not a lawyer, but it seems like you need to be one in order to properly gauge the risks that are in Johnson & Johnson (NYSE:JNJ) stock these days. Year-to-date the stock is only up about 3%, so it is definitely lagging the S&P 500.

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The headlines keep coming and on many fronts. Jubilation over news of a settlement on one front is quickly stifled by news of a new lawsuit somewhere else. The stories became confusing quickly and there are no real experts here. Most news is noise, however, so we simplify matters.

When the headlines are murky, it is important to strip things down. We have facts that we can control, versus the headlines that are unpredictable. Johnson & Johnson is a 133-year-old company that has earned people’s trust. I trust that JNJ management was not malicious in its actions during any of its courtroom battles.

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Eventually these headlines will abate and JNJ stock will go back to trading on its own merits. In spite of all the worry and uncertainties, the stock is still within 7% of its all-time closing high. This by no means minimizes the severity of the issues at hand, but this a great American company — not a crook.

Fundamentally, the stock is not dirt cheap since it sells at over 20 price-to-earnings ratio, four times sales, and almost six times book value. For reference, this is more expensive than Apple (NASDAQ:AAPL). Even though JNJ stock is not bloated, the value alone is not a reason to buy the stock at these levels. So for better trading decisions, we lean on the charts for information.

Johnson and Johnson Stock Chart

This week, JNJ stock rallied hard off of $129 per share. And once the bulls cleared the $133 neckline, they set in motion a breakout to target the prior ledge near a $140 per share. There will be resistance there since it was a prior ledge. So this is not an obvious entry point. Those long the stock can stay in it because that has been a historically winning strategy. But if I’m looking for an opportunity to trade it, I should wait to see how it acts as it approaches the ledge at $140 per share. The drop from the July earnings report left many traders stuck, so once Johnson and Johnson stock recovers, those stuck may want to get out.

On the shorter time frame charts, this most recent JNJ rally left a lot of gaps. And when there are so many in a row, inevitably we need a check-back to fill a few of them and eliminate the weak hands. Ideally I want to see a dip in JNJ closer to $133 per share. This would make for a better entry point with a tight stop. The opportunity then would be to ride the extension of the rally that started in early September. With a good base at $133, the bulls will be able to break through the resistance zone at $140 per share.

JNJ Stock Takeaway

This sounds complicated but it’s really simple. Nothing goes up in a straight line without any breaks. Every rallys needs periods of rest and those usually happen around pivot zones. This is why they say that prior resistance becomes forward support, and vice-versa. Once JNJ stock takes out one resistance zone it is normal to come back and retest it for footing. This way they can repeat the process to continue the ascending trend of higher lows and higher highs.

The bottom line is that Johnson and Johnson stock is in proven performer. Those who have held it for decades have a lot of profits to show for it. It has entered into a vastly choppy range for the past few years but that will end up being a solid consolidation zone for bulls to use to break out to new highs. Until then we take it one line at a time just like we discussed here.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.

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