Dow Chemical Co. (DOW) surged higher at the end of November, joining strong rallies in other infrastructure and industrial stocks. The uptick places the Michigan-based chemical giant in an excellent position to break out and head into a sizable trend advance. It also bodes well for the broad swath of similar manufacturers that have underperformed major benchmarks in recent years.
The company is currently seeking a merger of equals with Dow component E. I. Du Pont de Nemours and Co. (DD), intending to create a chemical super-company called DowDuPont at the same time the industry is coming back into vogue, due to the Trump presidency. This perfect timing could intensify buying interest, lifting the combined entity into market leadership.
Federal, state and European Union regulatory agencies have delayed the merger indefinitely due to anti-trust concerns, but the business-friendly Trump administration could clear the majority of roadblocks, opening the door to three intended public spinoffs that separate combined company operations into agricultural, material science and specialty products divisions.
DOW Long-term Chart (1993-2016)
The stock bottomed out at a 3-year low in the low teens and entered a channeled uptrend that continued into the May 1999 high at 45.95. It tested that price level at the start of the new millennium and sold off, entering a steep decline that found support at 23 in October 2000. Failed bounces in the next three years generated five tests at support, ahead of a 2003 rally that reached the prior high in 2004.
It broke out in 2005, but the rally stalled quickly at 56.75, ahead of a multi-wave downtrend that accelerated to a 25-year low during the 2008 economic collapse. The 2009 reversal recouped the majority of losses into 2011, but it took three more years to complete the round trip. The final surge stalled within two points of the 2005 high in September 2014, yielding a choppy correction that carved two lower lows into the August 2015 mini flash crash, followed by two higher lows into the November 2016 election.
Price action since 2005 has completed a massive cup and handle pattern, with resistance at 57, but it’s difficult to time a breakout because the cup has been forming for more than two years. Most likely, an all-clear on the merger agreement will set that uptrend into motion, but it could also unfold if the two companies terminate their plans due to heavy opposition.
DOW Short-Term Chart (2014-2016)
The long uptrend fizzled out near $55 in September 2014 (green line), yielding a trading range that that posted a failed rally to $57.10 in December 2015 (blue line). A higher low into the first quarter of 2016 found willing buyers, triggering a steady uptick to $54, followed by a shallow rising channel (red lines) that added less than two points into the election. The stock broke the channel to the upside at the end of November, after it has risen to the level of the 2014 high.
It’s now testing the 2015 high, which also marks the final barrier ahead of a multi-decade breakout. The channel breakout has established new support near $55, with the $54.50 to $55 price zone offering a low risk buying opportunity for patient market timers. That patience may be tested because the stock could run in place for months if there’s no resolution to the merger dispute.
The Bottom Line
Dow Chemical has completed an 11-year breakout pattern while merger partner Du Pont has ground out a similarly bullish price structure. Fresh buyers are stepping up to buy both stocks, expecting a business friendly Trump administration to clear regulatory hurdles and allow their union to proceed. Even if this marriage falls apart in 2017, bullish sector sentiment may still yield breakouts in both issues.
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