Tech Talk: The Double Bottom And Reversion To The Mean
Suppose you want to own an overseas stock not listed on a North American exchange? One way to do this is to buy what’s called an American depositary receipts (ADR). These vehicles gave you foreign equity exposure and, therefore, can enable you to better diversify your portfolio.
Of course, if you get such an asset at a technically astute time, all the better. Take the case of Novo Nordisk, charted above.
The company is a Denmark-based health-care company specializing in diabetes-care medication and devices. The company has no long-term debt, comes up as the best economic performer of the group with a dividend yield of 1.7% and a one year return on capital of 60%. Its market cap, until its recent crash, was US$114 billion. However, last week the company a variety of news reports worried that the company was losing market share in its diabetes care specialty.
To my mind, that recent crash makes the story technically interesting.
In the chart above, you will notice that I have indicated two recent bottoms. I have also circled in blue the correspondence of those two bottoms with an oversold condition indicated in the relative strength index (RSI) panel.
I drew the trend line in the centre of the chart to coincide with the midline of a Raff regression channel is a linear regression with evenly spaced trend lines above and below. I didn’t use the full channel because the top and bottom lines are not particularly relevant in such a volatile chart over a short, one-year period.
Rather, the point I want you to consider is that chart is likely to revert to the mean – that is, back toward the blue line. If it were to do so, there could be some good gains in this stock.
I never recommend stocks, of course, but in this case I did buy some NVO on the logic that the company is likely to revert toward the mean.
Full disclosure: None.