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Issue #40 
October 7, 2007 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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| Indexes are on a breakout, but facing fundamental questions.
DOW Friday close at 14066
It is important to note that even though the DOW showed a lot of strength on Friday and made new all-time highs it was not able to close higher than last Monday's close at 14088. It was able, though, to confirm the last week's weekly close breakout and is likely to continue running up to fulfill the objective of the flag formation with a rally up to the 14200-14268 level.
There are now four price levels in the DOW that need to be monitored closely this week. The first level and least important but the timeliest is the 14088 daily closing price level the DOW failed to close above. After having gone higher intra-day on Friday but closing below the previous daily high close made on Monday of last week, a second daily close below that level on Monday will be seen as a negative. The second level is the recent low daily close at 13968. Any daily close below that price will definitely bring in selling into the index and put the DOW on the defensive. The third level but important only next Friday will be 13907. This level will become more important as the week progresses, as it is the breakout price on the weekly charts. Closing below that price on a weekly basis (Friday's) will generate a failure signal. The last level and without a doubt a major support and pivot point is 13676. Any close below that price will generate heavy selling both from the bears and the bulls.
On a positive note, the action on Friday should help generate additional follow-through to the upside and a rally above 14200. In looking at both the daily and weekly chart the DOW seems to be back on a strong up-trend and has no resistance above.
My personal belief is that the fundamental picture is not strong and that this move up is part of a longer-term corrective phase. At this time, though, I do not have any chart action that confirms my theory and therefore the best that can be done is play the market with caution.
NASDAQ Friday Close at 2780
The NASDAQ certainly acted much stronger than the DOW on Friday as it was able to gap up and close near the highs of the day. The action on the NASDAQ certainly spells out follow through on Monday.
The NASDAQ is the only index that is still below its all-time highs and therefore in looking back on the chart to 1999 and 2001 it can be seen that a very strong resistance level is about to be reached between 2875 and 2892. It seems difficult to believe that under the current fundamental picture of the economy that the NASDAQ will be able to get above that level at this time.
In addition, the NASDAQ has left 3 gaps unfilled. The first one is at 2461-2505, the second one at 2684-2690, and the last one this past Friday at 2736-2750. This is not an index that has a habit of leaving gaps unfilled and therefore all three gaps are at risk of sustaining closure.
The weekly chart back in 1999 and 2001 seems to suggest that a trading range between 2893 and 2218 is a possibility. In 1999, after the NASDAQ reached the 2884 level it then corrected back down to 2442 and that seems to be the most likely scenario if this resistance level holds up. Such a scenario would fulfill closure of all the gaps.
In looking at the daily charts it does seem that the NASDAQ is likely to continue to run up this next week. I do not see any resistance between Friday's high at 2785 and the mid 2800's level. A run up of another 100 points would likely mean the DOW would reach its objective of the mid to upper 14200's.
On the downside the 2720-2725 level will now become very important as any close below that level will signal a failure. Below that, the next support level would be 2670.
S&Poors 500 Friday close at 1557
The SPX was finally able to make new all-time highs with its rally up to 1562 and above the previous high of 1555. The weekly close was also a new all-time high. Previous high weekly close had been 1553.
Objective of the rally will be the 1580 level, based on projections of the flag formation it broke out from. It is very evident that the 1550-1553 level will now become major support and pivot point and closes below that level will be negative. Support below that level will be found at 1536-1540, and major support at 1504-1506.
Making an all-time high is always a major event but it does carry several clearly defined chart obligations with it. Daily and weekly closes above the breakout level need to be maintained. The index also needs to rally sufficiently that when a corrective and re-test phase occurs the index still stays above the previous high. This means that any weakness at this time, or over the next week or two, could be construed as a failure and such action always will generate aggressive selling.
One important note to mention. Back in the 1999-2000 the SPX was making new highs every couple of months by about 60-80 points above the previous highs but was also correcting almost 150 points thereafter. The weekly ranges at this time are commensurate with the weekly ranges back in those years and show the likelihood of the same kind of action.
My own personal opinion is that the indexes will not be able to do much more to the upside and that this rally will be short-lived. The NASDAQ will likely be the key at this time due to the clearly defined resistance levels from the past.
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Stock Analysis/Evaluation
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CHART Outlooks
Several of my mentions this week are at pivotal levels that offer clearly defined risk/reward ratios. Though some of the mentions will react to general market conditions it is also my belief that the indexes will top out once again very soon.
SNDA (Friday Close at 37.29)
For those of you that may be looking for an aggressive trade with a fast short-term profit potential SNDA is the stock to look at. The rally two weeks ago up to 39.08 reached an area of major resistance on the weekly charts going back to June 2005. After reaching that area SNDA seemed to hit a brick wall and has dropped over $3. A rally to re-test the resistance area is likely as the stock has been on a very strong up-trend over the past month and is not likely to turn around without at least a re-test of the highs.
It is highly likely as well that SNDA will correct back down to at least the 32.98 level at this time and it is also likely that SNDA will get into a range between $30 and $40 for the next few months.
On a weekly closing basis there is major resistance at 38.71 and on a daily closing basis at 39.26. The 38.68-38.71 seems to be a good area where shorts can be placed. It is likely that a rally up to that price will be seen as a re-test of the recent 39.08 intra-day high. Support will now be found at 32.98 from two previous daily high closes, 1 daily low close, and the 20-day MA. On an intra-day or intra-week the support is down at 31.96. Major support will now be found at 29.72.
Sales of SNDA at 38.60 should be made placing a stop-close only stop loss at 39.26 or an intra-day stop loss at 39.75. The first objective and most likely to be seen on a pullback is 32.98 but a drop down to $31 and even down to 29.72 are definite possibilities. The 29.72 level needs to be considered major support and in looking at the weekly charts likely to be seen sometime over the next few weeks or couple of months. Risk/reward ratio on the trade is at least 5-1.
My rating on the trade is a 7 (on a scale of 1-10 with the strongest probability rating being 10).
ABC (Friday close at 45.84)
ABC is a stock I shorted back in the second week of September at 47.94 for a $3 move to the downside. ABC has rallied since I got out but only up to a strong resistance level, on a daily and weekly closing basis, at 46.30. The stock continues to have a bearish looking chart as it is in a well-defined downtrend since the high was made back in April at 56.56 with continued lower highs and lower lows.
In addition, ABC broke below the 100-week MA 4 weeks ago (now at 46.30 on a weekly closing basis) and has not been able to get above it. Last week's rally up to 46.52 failed to close above its resistance level and with several of the indexes making new all-time highs on Friday ABC was only able to rally back up to 46.03.
The mid 44's level was major support prior to the break down to 42.67 and subsequent re-test at 43.00. That same level is now once again strong support as the stock has gone down to that level on multiple occasions over the past couple of weeks. In my opinion there are too many closes between 44.40 and 44.61 which will act as a magnet and continue to draw the stock down to that level if unable to close above 46.30 on a daily or weekly basis.
Sales of ABC between 46.15 and 46.25 and using a stop loss order at 46.60 and an objective of 43.73 will offer a risk/reward ratio of 6-1. A possible drop down to the $40 level could easily happen increasing the risk/reward ratio to over 10-1. If stopped out of the short you should look to re-institute the short on rallies up to the 48.00 level and using the same objectives. In reality the weekly downtrend is still intact and drops down to the $40 level are quite possible and even probable. Rallies above 49.00 are needed to turn the trend around.
My rating on the trade is a 7 (on a scale of 1-10 with the strongest probability rating being 10).
CEGE (Friday closing price 3.67)
CEGE is a stock that seems to have built a strong support base from which to start an up-trend. For the last few weeks it seems the sellers have attempted consistently to push the stock lower but have failed. A rounded bottom seems to have been built with the left shoulder at 3.35, the head down at 3.22 and the right shoulder at 3.37. A strong support level at 3.48 is in place and this past week the sellers tried to get it down to that price but 3.55 seems to be the best they could muster.
The 100-day MA is currently at 3.70 and was tested twice this past week without causing a sell-off. Breaking above that level will likely generate a short-covering rally as well as new buying. The way the stock has held support it seems likely the resistance levels will now be under pressure. There is an additional resistance at 3.91 from a previous high. Breaking above that level will give a strong buy signal. There is additional resistance at 4.23 and 4.71 but those two levels need to be considered as minor. Major resistance is at 7.30.
Purchases of CEGE around 3.60 with an objective of 7.30 and using a stop loss at 3.16 will offer 8-1 risk/reward ratio. If a sensitive stop loss is desired, it can be placed at 3.42 thus increasing the risk/reward ratio substantially. It is unlikely that CEGE will get below the 3.48 level.
My rating on the trade is a 7 (on a scale of 1-10 with the strongest probability rating being 10). If CEGE gets above the 3.91 level my rating would go up to 8.5.
HRB (Friday closing price 22.42)
HRB is a stock that has been in a weekly downtrend since July 2005 when it reached a high of $30. The downtrend has had consistent lower highs and lower lows and just 8 weeks ago HRB made a 4 year low with the drop down to 17.95.
The recent rally up to Friday's high of 22.42 has not run into any major resistance. HRB is now getting into an area where there are several resistance levels starting with the 50-week MA at Friday's high of 22.46 as well as the 100-day MA at 22.69. This is also an area with a fair amount of congestion and without a fundamental catalyst to spur the price up it is likely the stock will falter around here.
HRB is now strongly overbought and little support has been built on the way up. The closest support and probably major pivot point is 21.40 and drops down to at least that level are highly probable. Daily supports below that level are at 20.60, 20.35, and 20.15. Using the weekly chart, strong support should be found at 20.16, 19.80, and 18.31.
If the weekly downtrend is still intact it is possible the recent low at 17.95 would get broken.
Sales of HRB between Friday's closing price of 22.42 and up to 22.69 and using a stop loss at 22.96 and an objective of 20.16 would give at least a 4-1 risk/reward ratio. Drops down to the pivot point of 21.40 would offer at least a 2-1 risk/reward ratio with a high probability of success.
My rating on the trade is 6 on a scale of 1-10 with the strongest probability rating being 10.
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Updates
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| Update on held stocks
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Status and stop loss changes
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NUAN broke out above the $20 level convincingly and closed near the highs of the day thus providing expectation of further up moves on Monday. You have to look all the way back to 1996 to find resistance on the chart. Back then, the 23.00 level proved to be strong resistance and a double top exists, on the weekly charts, at that price. In between the double top at 23.00 there was a high of 22.25 which may be this rally's objective. Even though those price levels were over 12 years ago and a much different fundamental scenario existed, it is likely traders will use those levels to trade off of due to the shaky status of the indexes. The 19.70 level, on a closing basis, will need to be maintained if NUAN is to go higher. PMCS continues to close in new 52-week highs and in a strong up-trend. There is some minor resistance at 9.26 and just a little bit stronger but still minor at 9.50. Any daily close above 9.47 will likely generate a move up to the 10.33-10.77 level where the resistance becomes stronger. Support should now be found at 8.74, especially if the stock is able to rally up to the 9.50 level. WOLF managed to close right on the 20-day MA at 13.09 and any close above this level on Monday will likely generate a move up to the 13.63 level where there is previous resistance as well as the 50-day MA. The 12.89-12.92 will act as support if the stock is able to rally on Monday. Drops down to 12.61-12.68 are still possible but further weakness will be negative. Any close above 14.10 could re-generate the upward trend. MWA had a very positive close on Friday closing above the 50-day MA at 13.09 and on the highs of the day. There is some resistance at 13.53 from a couple of major previous lows but if able to close above that price there is no resistance until the 14.50-14.73 level is seen. At 14.73 the 100-day MA currently resides. The 12.67 level should now be considered strong support but breaking above the 50-day MA means it should not get below it anymore. The 50-day MA is currently at 13.08. ININ, in looking at the weekly chart and going back 10 years, is now at a major pivot point that has proven itself to be very important. The 22.26 level was a major support level back in the year 2000 after it rallied up to $50 and then again a second time when it rallied back up to the $44 level. In addition, the most recent daily and weekly closing high (resistance) has been 22.21. In looking at the charts ININ seems to have committed itself, at this time, to making new highs. Failure here could cause the stock to go back down toward the $14 level. A close above 22.26 could generate a strong rally up toward the $35 level. Drops below 21.40 would be negative. CRAY encountered the 100-day MA on the rally up to 7.38 and dropped back after reaching it. The close on Thursday was right at the 20-day MA and the low of that day (6.62), if broken, would signal further downside. It is now evident that on a daily closing basis the trading range is likely to be 6.75-7.31 and a break above or below those two levels will generate follow-through. PAAS traded down to the 20-day MA with the drop to 27.27 this past week and rallied thereafter up to the resistance level found around 29.00. The daily chart of PAAS actually looks bullish but the weekly chart looks bearish. A break above 29.72 intra-day will stimulate the upside and a break intra-day below 27.27 the downside. PAAS definitely seems to be at a crux point which will likely be decided very shortly. Stops above 29.72 are a must.
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1) PMCS - Averaged long at 7.90. Stop loss raised to 8.40. Stock closed Friday at 9.08.
2) XING - Covered short at 11.80 at 11.74. Profit on the trade of $6 per 100 shares minus commission.
3) CEGE - Purchased at 3.60. Stop loss at 3.42. Stock closed Friday at 13.67.
4) ININ - Purchased at 18.19. Stop loss raised to 21.30. Stock closed Friday at 22.08.
5) SONS - Averaged long at 7.09. Stop loss now at 5.80. Stock closed Friday at 6.10.
6) PAAS - Shorted at 29.14. Stop loss at 29.76. Stock closed Friday at 28.86.
7) CRAY - Purchased at 6.05. Stop lowered to 6.54. Stock closed Friday at 6.82.
8) MWA - Purchased at 12.24. Stop loss raised to entry point at 12.24. Stock closed Friday at 13.37.
9) INAP - Covered short at 15.18 at 14.68. Profit on the trade of $50 per 100 shares minus commission.
10) WOLF - Long at 13.82. Stop loss now at 12.54. Stock closed Friday at 13.09.
11) AOB - Shorted second position at 11.45 for average short at 11.21. Covered short at 11.97. Loss on the trade of $146 per 100 shares (2 mentions) plus commission.
12) CLDN - Covered short at 14.42 at 11.12. Profit on the trade of $330 per 100 shares minus commission.
Previous Newsletters
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The opinions and commentaries by Mr. De Vito are not a recommendation to buy or sell, but rather
a charting guideline, based on his own knowledge and experience, regarding the stocks he is following or
that are brought to him by others. Mr. De Vito does not presently offer a track record of his trading experiences.
No inference of success and/or failure should be assumed. The
information enclosed above, regarding his background, length of trading, and experience, is correct
but is not meant to suggest, state, or infer any future success in trading, based on his opinions. The information herewith included should only be used by investors who are aware of the risk inherent in securities trading. Mr. De Vito accepts no liability whatsoever for any loss arising from any use of the information and/or comments he supplies. |
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