Two stocks that stuck out to me this weekend when I was doing my homework were DD and UTX. Both of these stocks are coming into key support levels and are extended from their flat / downward sloping 200 day moving averages. Given those circumstances, I think that both of these stocks are setting up for a nice mean reversion to the upside over the next couple of months.

The first stock I want to look at is Dupont. This stock has been beaten down with the rest of the materials sector, but we’re now at a point where looking for a bounce makes sense from a risk/reward perspective.

chartAfter breaking down through the neckline of a complex head and shoulders pattern in late June, price has since met its 12 point price objective near 53. This also corresponds with a prior resistance level from 2011 and 2013. Prices have since put in multiple failed breakdowns below that key level and are now attempting to break out above a very steep downtrend line as momentum positively diverges. With prices currently 25% below their 200 day moving average, I think that the risk/reward favors the long side down here. If you’re an aggressive trader, you can own it here against the late July lows, but if you’d like to wait for confirmation then buy it on a break and close above this downtrend line. My major price target is near 61.25, as that represents prior support and the 38.2% retrace of this decline, but if prices consolidate and set up again we could see the 200 day and prior support up near 65.

Next up on my list is United Technologies. After a false breakout above the 2014 highs, this stock was sold off hard and is now testing a big support level. chartGiven the relatively flat 200 day moving average, I think we can take advantage of the choppy trading environment that is likely to develop by looking to a mean reversion strategy. As we can see, price has been in a very steep downtrend, but has begun basing above a key support level as momentum positively diverges. I think the catalyst for breaking above this downtrend line and starting to move higher is the false breakdown that occured below the late July lows. Aggressive traders can own this above those late July lows, while those waiting for confirmation can get long on a break and close above this downtrend line. In terms of price targets I’d expect some resistance near 103-104, but could see prices entering and filling the gap to 110.50 if we consolidate and breakout above that multi-year support/resistance level.

The Bottom Line: I know these stocks have severely underperformed the major indices year to date, but I think that current conditions make them both ripe for a mean reversion trade to the upside. The best part is that in both instances the risk is well defined and the risk/reward ratios are in the double digits. Can’t ask for much more than that!

As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.

Time To Buy These Dow Laggards?