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Issue #42 
October 21, 2007 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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| Failure signal generated and confirmed!
DOW Friday close at 13522
The DOW went down a total of 572 points from last week's close and broke below most of the strong supports in doing so. Certainly this type of action is a strong sell signal as anytime a stock or index fails to follow-through on an all-time high it can be expected that disappointment will be major.
The previous weekly all-time high was 13907 and with Friday's close almost 400 points below that level it can be said that the recent up-trend has now been reversed. In addition, the previous level of resistance at 13639-13693 should have worked as support and yet the DOW pierced through that level without stopping and closed on the lows of the day and of the week.
There is some support at the 13500 level from a previous low and a previous high but it must be considered minor in nature. The 50 and 100-day MA's are both crossing at 13561, on a daily closing basis, so if the DOW is able to hold the 13500 support level and manage a close above 13561 on Monday the break of the MA's will not be confirmed. On a weekly chart basis it is also important to note that the 20-week MA is currently at 13528 so if this level holds up on Monday it could generate a rally back up to the 13907 level. Any close on Monday below 13500 will confirm the break below the MA's and likely generate immediate further downside.
The 13500 level will likely be working as a pivot point with and upside objective of 13691 and 13907 or a downside objective of 13210-13250, depending on which was the market pivots at that price.
The drop on Friday was very negative as it came all in one day. Such action generally generates quite a bit of additional follow through, if not the very next day, certainly within a week or so. Based on the type of drop sustained I would expect that the 13250-13210 level to be this coming week's objective. I believe there is a fair chance of a rally up to the 13691 by mid-week but if that level acts as resistance, as it previously has, the sellers will likely pound the market down by next Friday.
There is one level that must be kept in view for next Friday's close. As incredible as it may seem the lowest weekly close since March has been 13079. This includes the period when the DOW dropped to 12517. A close next Friday below 13079 would be extremely negative and would likely generate a move down to at least the 12763 level. Drops down to the previous low at 12517 or even perhaps down to the 12300 level will be possible under this scenario.
At this moment the only signal that the DOW has given is that it is no longer looking to go higher (probable sideways mode). A sell signal has not yet been given for the market to be shorted. I do believe the DOW is building a large top and rallies can be expected for the next couple of weeks even if the DOW drops down to the 13250 this coming week. Nonetheless I do expect that within a few weeks clearly defined sell signals will be generated and that a bigger drop will happen thereafter.
NASDAQ Friday Close at 2725
The NASDAQ continues to be the strong index at this time. This past Friday it managed to hold above its major weekly breakout area with the close above the previous weekly high close of 2707 and daily high close of 2720. This action was nowhere near as negatively decisive as it was in the DOW and the SPX
Friday's close above both previous closing highs has left open the possibility that the NASDAQ may still rally back up to the previous high and even surpass it. Evidently closes below 2720, on a daily basis, will alter the chart and change the evaluation.
Support below the 2707-2720 level gets quite tricky as there is little to be found in the way of support until the 2625 level is seen. At that price the 20-week and 100-day MA's are found. Below that there is some minor support at 2566 and the major support is found at the 2500-2510 level.
On the upside the 2759-2764 level should pose problems as that is the support level that the NASDAQ broke on Friday. In addition, the 20-day MA is currently right around 2750 and should also add strength to that resistance level as well.
A few weeks ago I mentioned that there were three gaps in the NASDAQ that will act as magnets. The first gap at 2734 was closed on Friday. The second gap is down at 2684 and the third gap is at 2461.
It is probable, if the NASDAQ does not break the support at 2720 on Monday that a rally up to the mid 2700's will be seen by mid-week. Nonetheless if the indexes fulfill their negative scenarios, it is likely that the NASDAQ will also give a failure-to-follow-through signal and close below 2720 on a daily basis and below 2707 on a weekly closing basis next week.
One key to watch is not only the 2720 level but the 2764 level. If the NASDAQ is able to close above 2764 on a daily basis there is a good chance it will attempt to go at the highs again and perhaps even surpass them.
Overall I do see the possibility that the NASDAQ could go as low as 2400 before this correction is done.
S&Poors 500 Friday close at 1500
The SPX led the decline percentage-wise this week. As has been the case for the past year, the SPX has been the leading indicator for all trend moves in the indexes. This past week the SPX not only broke below the 20-day MA but also on Friday below the 100-day MA. It is within a few ticks of the 50-day MA, currently at 1496.
There is important support just below Friday's close. On a daily closing basis 1491 is absolutely critical, as there are 4 previous daily low closes at that price as well as the 20-week MA. Any close below 1491 will likely generate moves down to the 1450-1460 area as well as give a strong sell signal.
If the support level holds, rallies up to the 1541 level may be seen but that level will now become strong resistance.
Like the DOW and the NASDAQ, the SPX is at a pivotal level in the charts. Any further weakness will be a strong sell signal and could cause the index to fall as low as 1380-1400.
Friday's close below the 1506 level means that the up-trend has totally stalled and that the upside will now be limited. Rallies this week could occur but its unlikely that the SPX will be able to get above the 1539-1541 level for the next few months.
The indexes gave a strong signal this past week that things are not well in the economy. The possibility of further interest rate cuts might give some support to the market for the next week or two, but ultimately even if such cuts occur (in my opinion, doubtful) the indexes are showing signs that renovation of the up-trend, at the present time, is no longer viable. The question now becomes "how low can the indexes drop.
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Stock Analysis/Evaluation
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CHART Outlooks
With the decisive break and failure signal in the indexes given, the short side of stocks should be explored. Nonetheless this week care must be taken because it is likely that a rally in the indexes will occur before further downside happens. All mentions on the short side this week require a rally in order to be filled.
PAAS (Friday Close at 29.99)
PAAS is once again a short candidate because it has failed to generate a new all-time high during this recent strength phase. The all-time high is 32.46. On this last rally, on an intra-day basis, PAAS got as high as 32.24 but has failed to close any higher than 30.84 on any of its attempts above 31.00 or 32.00. This means strong selling came in at the higher levels. With the indexes now giving a sell signal it is likely the sellers will become more aggressive and PAAS will get into a corrective phase, like the indexes, since it has moved straight up from its recent low at 20.80 without having had one.
Resistance on an intra-day basis will be found at 31.10-31.25 and then again at 31.64 and 31.84. Resistance on a daily closing basis will be found at 30.48-30.58 and then again at 30.84. Support is strong at 29.70, at 27.03, and major at 26.28 as well as at 25.00.
Sales of PAAS at 31.10-31.25 with a stop loss at 32.30 and an objective of 26.28 will offer a risk/reward ratio of over 5-1.
My rating on the trade is a 6.5 (on a scale of 1-10 with the strongest probability rating being 10).
NTES (Friday close at 19.95)
NTES over the last 8 weeks has run up from a low of 13.45 to a high this past week of 21.23. The move was accomplished with only one small correction in September from 17.88 down to 16.49. The rally up to the 21.23 level ran into a strong resistance at that price dating all the way back to October 2005. Even though the stock has been as high 24.44, the 21.23-21.49 has shown itself to be a strong resistance level on the weekly chart on 8 different occasions.
The drop, back down below the $20 level on Friday, shows that the stock has run into strong selling area upon reaching above $21. The close on Thursday at 20.51 also fulfills an upside target and should be strong enough resistance to generate a minimum drop back down to the 19.25 level. Support is decent at 19.25 but should that support level break a drop down to the 16.49 level is highly probable.
It will likely be difficult for NTES to get above 20.51, especially on a closing basis, but it is possible that an intra-day rally all the way up to 20.86 will be seen. That rally is a good opportunity to short the stock with a clearly defined stop loss point at 21.33 or a close only stop loss at 20.61. Objective on the downside is a highly probable drop to 19.25 which offers only a 3-1 risk/reward ratio but should the indexes break as I anticipate that they will within a week or so, a drop down to the 16.49 level would then become probable. Such a drop would offer a risk/reward ratio of at least 7-1.
The hard part will be to have NTES rallying to the desired entry point as it is possible that the stock has done all it needs to do to the upside.
My rating on the trade is an 8 (on a scale of 1-10 with the strongest probability rating being 10) for a drop down to 19.25. The rating drops down to a 6 for a drop down to 16.49.
VOL (Friday closing price 16.95)
VOL is a stock that has been in a very strong 9 month downtrend from a daily closing high of 42.20 seen in February. Recently VOL has seen a correction upward but only after having broken below all major support levels. The chart still looks quite bearish.
VOL has tested the previous supports levels, now considered resistance, and has failed to close above them. The only strong support level left on the downside has not been tested yet, and its likely that with weakness in the chart and in the indexes will cause that support level to be reached.
The 18.18-18.70 level, on a weekly basis, was important support and now is important resistance. In addition with a recent intra-day rally up to the 19.00 level (18.67 daily close) the 100-day MA was also tested successfully. With the indexes giving sell signals this stock seems to be a perfect sell if the desired entry points are reached.
There is a gap that has been left open between 15.29 and 16.43 that is working like a magnet and seems like a prime candidate to be closed, due to the overall weakness of the chart as well as the indexes. The resistance is now decent at 17.69 and strong between 18.00 and 18.18. Support will be found at the previous 52-week low of 14.41. Below that the strong support level is between 11.75 and 13.39.
Sales of VOL between 17.67 and 18.00 should be attempted using a stop close only at 18.28 or an intra-day stop loss at 19.10. Objective of the trade is 13.35-13.75 on a closing basis or 12.73 on an intra-day basis. Risk/reward ratio on the trade, if filled, would be about 6-1.
My rating on the trade is a 7.5 (on a scale of 1-10 with the strongest probability rating being 10).
MMC (Friday closing price 24.30)
MMC is a stock that has been in a strong decline since a high at 67.84 was made back in the year 2000. In addition, MMC received a dramatic drop in price back in October 2004 when it dropped from 47.25 down to 22.75 in one week. The stock has never recovered from that and is now showing signs it wants to go lower by having broken strong weekly supports on Friday.
During a period of 3 years MMC basically traded in a clearly defined trading range between 27.00 and 33.00 but over the past few week that trading range has broken down and now MMC seems to be seeking a new area of support.
Breaks below major support offer a low-risk and high probability trade and with the indexes giving a sell signal, it offers increased probabilities of success as well. In addition, the chart is showing a long-term inverted flag formation of great bearishness, now that the stock has broken below its major support.
Support in MMC is found at 22.75 and at 21.69 on an intra-day basis. On a closing basis the support is at 22.50. Resistance will now be the breakdown point, on a daily closing basis, at 24.60-24.72. Breaks below the 21.69 level could generate an aggressive drop into the low $10's.
Sales of MMC between 24.55 and 24.67 and using an intra-day stop loss of 25.25 or a stop-close only stop at 24.90 and an objective of 21.69 offers a risk/reward ratio of almost 4-1.
My rating on the trade is 7 on a scale of 1-10 with the strongest probability rating being 10. This is a trade with excellent possibilities of success of reaching its objective but it also offers a good possibility that the support level in the high 21's will fail and if it does the stock could collapse down to the low 10's.
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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 dropped down to the support level at $20 and was successful in holding above support as well as the 20-day MA. A subsequent rally up to 20.90 occurred but the rally has stalled due to the weakness in the indexes. The 20-day MA has continued to move up and is now at 20.24. It is quite evident that the area between 19.92 and 20.24 is now quite important and any close below 19.92 will likely generate further downside. The 20.90 level must now be considered resistance, if able to break above that level, the 21.50 will be resistance as well. The parameters are very clear with a possible trading range between $20 and $21.50. A break above or below either of those two levels should generate follow-through. A break below 19.92 would generate a drop to at least 19.35. PMCS broke out above its major resistance this past week due to a positive earnings report. The close above 9.40 on Friday will likely generate a move up to the 10.49 level (10.34 on a weekly closing basis). Though the resistance at 10.34 is quite evident it is not considered major and if the stock is able to get above that level it is likely that a rally up to 11.95 will occur. That level can be considered strong resistance. A breakout from a flag formation occurred with Friday's rally and the objective of that flag is 10.40. Closing near the high of the day on Friday, in spite of a breaking index market, means that its likely that the 10.49 level will be reached this coming week. I would consider taking partial profits at that level unless a second gap is generated on Monday. If no gap is generated on Monday it is likely that a correction will occur once the 10.49 level is seen WOLF continues to test, to the nth degree, the outer parameters of support. Friday's drop near the previous lows at 12.15 and 12.27 is weakening the chart and increasing the probabilities of a break down. A break below these support levels will generate a move down to the 10.88 level and place the stock in a downtrend. Due to what is happening in the indexes the stock should be exited if the support levels break. This would not be considered a manipulated break. On the positive side the 100-week MA continues to hold and seems to be giving support to these lower levels. If the stock is able to rally and close above 13.09 a rally up to the $14 could occur. MWA broke below all of its previous closes on Friday and could be looking at further downside. Since there is no previous lows to look at there is no way to give an objective. One thing is evident, though, if the stock closes above 11.77 on Monday, Friday's break could be a false breakdown. Nonetheless if the stock is unable to rally on Monday and closes below 11.77 a second time it will be time to get out of the long positions. ININ tried very hard to maintain a close between 22.20 and 22.42 and was semi successful in doing so. Nonetheless it is important to note that if the stock starts to close below 22.20 on a daily basis this breakout will be considered a failure and exiting the stock would be the next thing to do. If the indexes rally on Monday (something that is somewhat likely) it could help generate a move up. The parameters of a breakout are very clear and a failure to follow through is a clear signal to get out. The daily chart continues to look very bullish with a very evident flag formation but intra-day moves below 22.12 will weaken the chart. Keep an eye on that level and if the stock starts to get down to the 22.00 level consider liquidating the longs. RMBS failed to get above the 21.50 resistance level and weakened Friday due to the indexes dropping. The 20-day MA is currently at 20.13 and therefore a rally on Monday is needed for that line to hold. The only other support on any consequence, on a daily closing basis, is 19.25. Any daily close below 19.25 will generate a move down to the $18 level. There is a gap down at 18.86 that is likely to be an objective on an intra-day move down. The resistance should now be 20.75. Any rally, on a closing basis, above that level will be considered positive. HRB reached the first objective of 21.40. There is strong support at this price from a major previous low as well as from the 100-day MA. Any break of this level will take the stock down to the mid 20's and fulfill my downside objective. Stops can now be lowered to 22.29 to lock in profits. SNDA had the kind of a drop Friday that could be the beginning of a strong move down but follow through to Friday's close is needed. The 36.96 support level on a daily closing basis held up on Friday and still leaves the door open for a rally. A daily close below 36.96 will be a break of the 20-day MA and will generate aggressive selling. There is some support at 35.54 (35.91 on a daily closing basis) but if broken there is nothing until the high $32's are reached. Resistance will likely be found now between 37.50 and 37.63. ABC had a very bearish weekly close, closing below all the support levels and at the lowest level since August 28 2006. On a daily closing basis there is still one close that is lower at 43.55 but by breaking below the major weekly closing support the stock is now officially under strong selling pressure. There is strong intra-day support down at 42.50 but on a closing basis the next one is 43.55. On a weekly closing basis the next strong support is 40.97. CEGE broke below the 3.48 weekly closing level of support and is now on the defensive. On a daily closing basis the 3.37 level is now quite important. The stock has failed to show any lasting strength over the past few months and seems to need some form of news to jump start it. ININ tried very hard to hold the breakout levels of 22.20 and 22.42. It was semi-successful in doing so by closing at 22.28. Any daily close below 22.07 will be a signal that the breakout may be failing. Much of the pressure on the stock on Friday was because of the falling indexes so looking at how the indexes fare on Monday will likely give a clue as to what ININ will do. I do expect the indexes to have some form of rally on Monday.
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1) PMCS - Averaged long at 7.90. Stop loss raised to 9.02. Stock closed Friday at 9.75.
2) ABC - Shorted at 46.06. Stop loss at 46.06. Stock closed Friday at 44.27.
3) CEGE - Purchased at 3.60. Stop lowered to 3.16. Stock closed Friday at 3.41.
4) ININ - Purchased at 22.26. Averaged at 20.225. Stop loss raised to 21.86 Stop close only. Stock closed Friday at 22.28.
5) SONS - Averaged long at 7.09. Stop loss now at 5.80. Stock closed Friday at 6.62.
6) PAAS - Covered short at 30.66. Loss on the trade of $162 per 100 shares plus commission.
7) CRAY - Liquidated long at 6.52. Profit of $47 per 100 shares minus commission.
8) MWA - Purchased at 12.24. No stop loss at present time. Stock closed Friday at 11.63.
9) HRB - Shorted at 22.46. Stop lowered to 22.23. Stock closed Friday at 21.30.
10) WOLF - Long at 13.82. Stop loss changed to 12.09. Stock closed Friday at 12.42.
11) SNDA - Shorted at 38.60. No stop loss at present time. Stock closed Friday at 36.98.
12) UTSI - Purchased at 4.37. Liquidated at 3.84. Loss on the trade of $53 per 100 shares plus commission.
13) RMBS - Shorted at 21.49. Stop loss at 22.10. Stock closed Friday at 20.00.
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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