Stock Of The Day: Reversal For Dow? Bulls Smell An Opportunity

Shares of Dow Inc. (NYSE:DOW) continue to trend lower Friday. They were hit hard after the company posted weak Q2 results yesterday.  But the bulls may be about to take over.

Midland, Michigan-based Dow is our Stock of the Day. There may have been a capitulation in the selling, the shares are oversold, and they have reached a possible support level. These three dynamics could all be bullish.

More than 65 million shares of Dow traded yesterday. This was the largest volume ever. It may signal a capitulation by the sellers.

Traders and investors who wanted to sell became frustrated. They got sick and tired of watching the stock drop.

As a result, they decided to just sell all of their shares. They stopped caring about the price. This is why such a large amount of volume traded.

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This can be a bullish dynamic. If buyers think the selloff was over and enter the market, they may have a tough time finding someone to buy shares from because the sellers are finished.

They may have to force the price higher to draw sellers back into the market and this could create an uptrend.

Dow is also oversold. This means the selling has been very aggressive and the stock has been pushed below its typical trading range. This will draw buyers into the market.

The red line on the chart below is two standard deviations below the 20-day moving average. According to statistics and probability theory, 95% of trading should occur within two standard deviations of the mean.

If the stock has exceeded this lower threshold, it indicates oversold conditions. As you can see, that's the case now.

The shares have also reached support.

There can be support at prices that had been support previously because some of the people who sold at the previous support regretted doing so when the price rallied. Some vowed to buy their shares back if they could do so at their selling price.

Now that the stock has returned to this level, they are placing buy orders. If there are enough of them, it will create support again.

This combination of being oversold and at support and the possible capitulation of the sellers may be bullish for Dow. A reversal and move higher may be about to begin.

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