Is 3M the Next General Electric?

3M Company (MMM) shares fell more than 2% on Tuesday after a downgrade by RBC Capital Markets, and the component of the Dow Jones Industrial Average (DJIA) is testing June’s three-year low at $159.32. The stock has been losing ground since January 2018, dropping the industrial giant into the 29th slot in Dow relative strength, just above Walgreens Boots Alliance, Inc. (WBA). That laggard replaced General Electric Company (GE) on the average in 2018, putting 3M in the hot seat if the Dow’s keepers need to add a new stock.

The performance of 3M is closely levered to the world economy, exposing the company to the impact of trade wars at the same time that it’s managing all sorts of profitable and unprofitable divisions, segments, and business plans. Ominously, this is one reason why GE went into a near death spiral in 2017. 3M is also exposed to unquantified risk from the chemical soup of polyfluoroalkyl (PFAS) ground water contamination, which has sparked a nationwide wave of litigation.

A shallow uptick cleared resistance at the 1987 high in the low $20s in 1991, yielding a modest uptrend that accelerated in 1995. It topped out in the low $50s at the cusp of the Asian Contagion in July 1997, marking the highest high for the next three years, ahead of a complex decline that found support at an 11-year trendline in the low $30s. The stock bounced at the trendline five times into 2001 and broke out, but the rally failed after the Sept. 11 attacks.

Positive price action cleared the 2001 peak in 2003, generating a swift advance to $90, followed by choppy mixed action into a 2007 breakout attempt that failed just seven points above the prior high. It broke trendline support during the 2008 economic collapse but remounted that level in 2009, generating major buying signals presaging a V-shaped recovery that completed a round trip into the prior high in 2011.

A 2013 breakout marked a historic buying opportunity, ahead of the most prolific gains so far this century. The uptrend ended in January 2018 after President Trump fired the first shot in the trade wars, giving way to a two-legged decline that shows no signs of bottoming out. The stock is currently trading near a three-year low after breaking support at the 50-month exponential moving average (EMA) for the first time since 2011. Even so, it has just crossed the .382 Fibonacci retracement level of the nine-year uptrend, raising the potential for much lower lows in coming months.

The monthly stochastic oscillator entered a long-term buy cycle in August 2018 that failed in April 2019 before reaching the overbought zone. It has now dumped back into the oversold level, but the prior failure keeps a contrary buying signal off the table for now. And given the stock’s proximity to 50-month EMA resistance at $185, there isn’t enough upside potential to buy a falling knife.

A Fibonacci grid stretched across the uptrend leg that started in 2016 places the June 2019 low at the .786 retracement level, which marks final harmonic support ahead of a 100% decline into $135. Last week’s reversal at 50-day EMA resistance has initiated a test of the low, which is now likely to break. Unfortunately, the downdraft may also cut through the .50 retracement of the multi-year uptrend, exposing the decline to the .618 retracement level at $125.

The on-balance volume (OBV) accumulation-distribution indicator offers a ray of hope to beaten-down shareholders, setting off a bullish divergence after hitting a new high in April 2019, when the stock was trading more than 40 points below the 2018 high. However, the sword cuts both ways because this buying pressure reveals a large supply of trapped bulls who may head for the exits in coming weeks.

3M stock is testing June’s three-year low near $160 and could head into harmonic support centered between $125 and $135. This unrelentingly bearish behavior may eventually attract the unwelcome attention of the keepers of the DJIA, risking the company’s multi-decade membership.

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