Illinois Tool Works (ITW) Will Drop At Least 3 Percent Soon
Published October 24, 2017
Illinois Tool Works Inc (ITW) has been trending up for more than two years. As the stock moves up, it naturally cycles up and down maintaining its upward bias. Some technical indicators are displaying major signals that the stock will soon drop. While one of these indicators is at a rarely observed extreme level; a combination of indicators also point out trouble on the horizon. The stock will most likely continue its upward trend over the long-term; but this next natural cycle down could impact investors. How bad will history repeat itself?
When we look at technical indicators, the relative strength index (RSI) is at 84.5283. RSI tends to determine trends, momentum, overbought and oversold levels as well as likelihood of price swings. I personally use anything above 75 as overbought and anything under 25 as oversold. The RSI is currently overbought and is at one of its highest levels ever. It can only take the stock down from here.
The positive vortex indicator (VI) is at 1.1854 and the negative is 0.6629. When the positive level is higher than 1 and higher than the negative indicator, the overall price action is moving upward. When the negative level is higher than 1 and higher than the positive indicator, the stock is moving down. Both indicators alone are not flashing any signals, but there movement in combination with other indicators are detailed below.
The stochastic oscillator K value is 89.5669 and D value is 90.4896. This is a cyclical oscillator that is highly accurate and can be used to identify overbought/oversold levels as well as pending reversals and short-term activity. I personally use anything above 80 as overbought and below 20 as oversold. When the K value is higher than the D value, the stock is trending up. When the D value is higher that the K value the stock is trending down. The stochastic is overbought and the D has overtaken the K signaling a decline for the stock.
I have created an algorithm (called the SAG gauge) which signals when stocks are truly overbought and oversold. The algorithm indicates when a particular stock meets multiple criteria culminating in an oversold or overbought signal. The overbought signal recently occurred and could occur again over the next few days. Seeing the other signs of a downturn, proactively positioning short for the stock's decline prior to seeing this verifying signal could increase profits.
Upon back-testing this indicator, it has signaled overbought status 104 times dating back to 1980. The stock drops at least 1.75% over the following 35 trading days in eighty percent of these occurrences. The stock drops at least 3% seventy percent of the time and forty percent of the time loses 5.75%. Even though a drop does not always occur, these numbers combined with the following statistics have instilled confidence that a greater than 2% drop is looming.
The RSI has been at or above its current level ONLY seven times in the history of this stock. The stock always drops over the next 25 days with a minimum drop of 0.93%, median decline of 2.52%, and average drop of 4.58%.
Only one other time since 2000 was the RSI and positive VI at or above today's level at the same time the stochastic oscillator was overbought with the earnings call three days away. The stock dropped 5.21% over the following 14 trading days on that occasion.
The technical indicators for this stock have been in the same or more extreme positions simultaneously only three times in the history of the stock. These all occurred more than 30 years ago. The minimum drop was 9.33% over 16 trading days while the median was 12.82% over 33 trading days.
Although not identical to the current technical readings, ten similar instances saw the RSI close to today's 84 reading while the positive VI was at or above its current position, the negative VI was at or below its current position and the stochastic oscillator was overbought. On these occasions the stock dropped at least 4.49% and saw a median loss of 9.72%.
Another odd thing has just occurred regarding the positive VI value. It was recently above its current 1.18 level before it dropped below 1 and moved back above 1.18. Although a move like this is normal, the positive level never crossed below the negative VI level. This similar movement has only occurred on five occasions. The minimum loss for the stock was 7.34% and the median drop was 8.50%.
It is clear the stock will drop at least 3% over the next 40 days after taking all of this historical information in to consideration. Our analysis is very supportive of the 3% drop, but would not be surprised if the stock lost greater than 5% over this time period. The RSI for the stock is at one of its highest recorded levels ever which indicates there is only one direction for the stock to move. There is no clear support levels if the stock were to give up 3% or even 5%. A strong support level for the stock would be around 7-10% lower from its close price on October 24.
DISCLOSURE: We currently do not have any positions in the mentioned stock. We may initiate a position in the next 72 hours. This article is for reference only and should not be solely relied on to predict future movement. Historical movements and technical indicators should never be the sole basis for entering positions involving risk. You should not take a risk without fully understanding the system, market, and having established trading discipline. Make sure appropriate research is conducted prior to taking any risk in a marketplace. The author and Limitless Life Skills LLC do not have a financial relationship with the companies mentioned in this article and all expressed views are that of the author.