How to Time a Blue Chip Buy

When you’re ready to buy a stock for purely fundamental reasons, you need to pay the best possible price for your investment.
 
Technical analysis is a tool that can help you do just that. Today, we’ll put it to work to analyze one of the most popular names on the market
 
From time to time, we get questions about specific stocks here at Penny Sleuth HQ — even the occasional blue chip. Take a look at this question that a reader sent in last week:
 
Please advise on your outlook for entry into JNJ as a long-term holding. Thanks!
 
— DS
 
This reader is talking about Johnson & Johnson (NYSE: JNJ), a $172 billion blue chip that’s got a hand in everything from pharmaceuticals to Band-Aid bandages and Tylenol. Let’s say that, like DS, you already want to buy a stock like JNJ for fundamental reasons — how can technical analysis help make sure that you’re getting in at an attractive price with minimum risk?
 
The first thing you do is open up a chart:
 
 
The chart above comes from StockCharts.com, a free charting website. It’s a candlestick chart (each day’s price is marked by a vertical bar called a candle), so it gives us a lot more information than the line charts that most investors are used to looking at.
 
I’ve gone ahead and drawn a few important annotations on this chart — the first one is the horizontal line right at $62.30…
 
$62.30 is an important price known as a support level; see how shares of JNJ have moved down to that price level and then bounced higher three times in the last several months?
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That’s support in action. As a technical analysis newcomer, the best way to think about support is as a “floor” for shares — it’s a price level that JNJ has difficulty moving below.
 
Support levels don’t exist because of magic — in more real world terms, we’re seeing support here because $62.30 is a price level below which there’s a glut of demand for shares. In other words, it’s a price where buyers become more eager to buy at a bargain than sellers are to sell their shares. When buyers are in control like that, we’ve got a scenario where risk is greatly reduced. After all, we’ve already seen that buyers are willing to swoop in and grab JNJ at $62.30, so the risks of a major drop in shares aren’t as high for investors who buy near that support level.
 
I’ve also circled a few small volume increases in the chart. In case you’re not familiar, volume is just the number of shares that trade hands on any given trading day — it’s significant because it indicates participation. And when JNJ tests support, we want to see buyers participating in accumulating shares…
 
With JNJ testing out that support level at $62.30, it looks like a pretty good time to be a buyer.
 
For folks who are new to technical analysis, buying a stock when it bounces off of support is a good way to reduce your risk on a fundamental investment without having to get into really advanced trading strategy.
 
I’ll be back next week to answer more of your questions. Keep sending your charts and tickers to editor@pennysleuth.com. Until then, happy trading…