Johnson & Johnson Scandal Could Signal Long-Term Top

Dow component Johnson and Johnson (JNJ) fell more than 10% to a four-month low in Friday's session after a Reuters report alleged that the drug manufacturer knew "for decades" about asbestos in Johnson's Baby Powder. The allegations, drawn after a review of documents released in ongoing litigation, were immediately disputed by a company spokesman, who called the report "false and misleading."

On Wall Street, Wells Fargo and Jefferies analysts are calling the sell-off overdone, but these types of news shocks rarely play out in a single day or week. In addition, the longstanding reputation of Johnson & Johnson stock as a safe haven could undermine price action well into 2019 because uncertainty is likely to trigger a rapid rotation out of the stock and into defensive plays not burdened with the headwind of sensational journalism.

The stock ended a two-year downtrend in 1994, turning sharply higher after bottoming out at a split-adjusted $8.91. It broke out to a new high less than one year later and took off in a powerful trend advance that continued into the March 2002 high at $65.89. A swift decline into low $40s filled out a trading range that contained price action until a 2005 rally cleared the prior high by just four points before rolling over in a failed breakout.

Breakout attempts in 2006 and 2008 failed as well, while a modest decline during the economic collapse held well above the 2002 low. The stock returned to multi-year range resistance for the fifth time in January 2013 and finally broke out, entering the strongest uptrend since the 1990s. That impulse topped out above $100 in 2014, while the subsequent correction found support in the low $80s during August 2015's mini flash crash.  

Two rally impulses into January 2018 ended at $148, yielding a vertical decline triggered by the opening shot of the current trade dispute. A bounce into March attracted little buying interest, giving way to new lows into May's short-term bottom at $118.62, while the recovery wave into November stalled at January resistance. A month of testing around that level lifted accumulation readings to new highs, indicating that a big supply of trend followers got trapped in last week's decline.

The monthly stochastics oscillator crossed into a sell cycle and surged lower in reaction to Friday's double-digit decline, predicting at least six to nine months of relative weakness. In turn, this bearish signal suggests that the decline will eventually reach May range support, while downside through that level would complete a multi-year double top breakdown that ends the three-year uptrend.

A Fibonacci grid stretched across the trading range since May 2018 places Friday's low at the .618 retracement level near $130. The stock is set to open Monday's session above $131, raising hopes for a short-term bounce that tests new resistance at the broken 200-day exponential moving average (EMA) near $136. That level up to the .382 retracement marks a nearly impenetrable barrier at the moment, suggesting that short sales will generate opportune profits.

Watch the on-balance volume (OBV) accumulation-distribution indicator in the coming weeks to gauge the depth of this painful system shock. It posted an all-time high in November, confirming the large supply of newly minted bulls, and fell to a two-month low on Friday. This is hardly a full-scale panic, raising the odds that selling pressure will bleed into price action well into the first quarter of 2019. Watch out for rapid downside if this distribution wave drags OBV through the May low.

Johnson & Johnson stock got pummeled last week after a news report resurrected decades of rumor and urban legend about toxic chemicals in the company's baby powder. Ongoing litigation by thousands of plaintiffs suggests that this unsettling story will linger and undermine the stock's long-term uptrend in the coming months. 

Disclosure: The author held no positions in the aforementioned securities at the time of publication.