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Issue #43 
October 28, 2007 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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| Waiting for the Fed!
DOW Friday close at 13806
The DOW had a choppy and volatile week that allowed the index to break a strong resistance and gain some momentum to the upside. The break of resistance was based on the belief that the Fed will be lowering interest rates next week, between ¼% and ½%.
The support down at 13500, on a daily closing basis, was able to hold all dips and by the end of the week the previous strong resistance at 13691 was broken. It now becomes evident that rallies up to re-test the previous highs up at 13907 (on a weekly closing basis) and 14000 (on a daily closing basis) will be attempted on this run.
The break of resistance at 13691 was not unexpected. There is no reason at this time, based on the expectation of a Fed rate cut, that the sellers would be aggressive. In addition, tops are normally not formed without clearly defined negative fundamental news unless there has been a successful re-test of the highs.
On an intra-day basis there is no visual resistance until the 14000 level is seen. Nonetheless the 13908 area could act as strong resistance as it is an important weekly close resistance. On the downside, support will continue to be strong at the 13500 level. Any daily close below that level will generate strong selling. Using the 10-minute intra-day chart, the 13586 support level could be a short-term pivot point giving an indication that the DOW might be continuing downward.
What this all means is that until the decision of the Fed is announced, the DOW might be in a trading range between 14000 and 13600.
There is one more additional chart to consider this week. Wednesday is the end of the month and the monthly chart will come into play. The highest monthly close ever has been 13896. Last month the DOW closed at 13807. The previous monthly high close had been 13627. These three price levels will likely come into play on Wednesday. Evidently a close above 13896 on Wednesday would be bullish, a close below 13807 would signal possible continuation of the correction, and a close below 13627 would signal a failure to follow through.
I still believe that the strength of the Fed action or lack thereof will bring a defined signal either way.
NASDAQ Friday Close at 2804
The NASDAQ continues to be the strong index at this time. It has reached the previous high daily close level with this past week's rally and is close, if it continues to rally, to generate a new 7-year high as well as another leg up in the trend.
The resistance at this level (2800 - 2812), on a daily closing basis, is very strong. A close above 2812 would likely generate a rally up to the next resistance level at 2864-2885. This is the level I mentioned, a couple of weeks ago, as the objective of this rally.
The NASDAQ does show some long term resistance dating back to 1999, on the weekly charts, between 2865 and 2887 but the monthly chart only shows the 2770 level to be of consequence. This is on a closing basis which means that on Wednesday it will be important to see where the NASDAQ closes the day.
On a daily closing basis the 2751 level must now be considered strong support. Below that level, the 2725 area continues to be a major support, which if broken, would be very negative to the mid-term future of the index.
Monday's action and close may be a strong short-term key to where the NASDAQ is heading to. A close above 2812 projects a rally up to 2787.
S&Poors 500 Friday close at 1535
The SPX continues to be the index to watch as to clues to the direction of the indexes. On Friday, in spite of the strength of the other indexes, the SPX was not able to get up to its strong resistance at 1540. The index seems to be in a clear trading range between 1540-1490, while waiting for some news from the Fed. The range might be extended up to 1556 if all the indexes show strength on Monday.
This past week support was strong at the 1490 level, as the SPX dropped down to that level on two separate occasions and held. After the test of support it was able to sustain a rally but resistance was non-existant. Using the 10-minute chart, support should now be strong at 15.20. Resistance is clearly defined at 1540 and 1556. Should that resistance level break, it would be likely the up-trend would resume. A close on Wednesday (the end of the month) above 1531 would also be considered a positive.
What is still weighing heavily on the SPX is the fact that new all-time highs were made a couple of weeks ago and the index gave a fail-to-follow-through signal. Such failure usually is followed by a reversal of consequence.
The index rally this week was totally based on a few good earnings reports as well as the belief the Fed will be lowering interest rates this coming week. Strength in the indexes should continue to be there on Monday but Tuesday and Wednesday should be the pivotal days in the indexes. The Fed is supposed to announce their decision on the 30th.
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Stock Analysis/Evaluation
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CHART Outlooks
With the rally in the indexes, based on the expectation of a Fed rate cut, this coming week is likely to be difficult to prognosticate until that information is made public. Short positions are still my favorite even if the Fed cuts ¼% but I have enclosed two long positions in my mentions. One requires a further drop in the stock to get to a price that is attractive and the other one a chart formation that I feel is an attractive risk/reward play.
PAAS (Friday Close at 30.87)
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. The stock has not had any weekly close correction since its move up from the 20.80 level and is up against an area of great resistance. This increases the chances of PAAS failing at this level.
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 30.84 and 31.70. Support is minor at 29.70, strong at 27.70, and major at 26.28 as well as at 25.00.
PAAS has left two gaps (29.08-29.14 and 30.00-30.43) on this recent move up and is committed to making new highs because of that reason. Any failure to make new highs will cause the gap areas to become strong magnets and cause closure of them.
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. If PAAS is looking strong on the opening on Monday you may want to wait for the 31.64-31.84 to be reached before shorting the stock.
My rating on the trade is a 6.5 (on a scale of 1-10 with the strongest probability rating being 10).
GPS (Friday close at 18.61)
GPS has been in a very evident trading range between 19.00 and 17.70 for close to 9 months. There have been two periods of time when the stock traded above that level and two periods of time when the stock traded below that level but generally speaking the stock has been in a sideways mode when looking at the daily chart. In looking at the weekly chart, though, GPS has been in a downtrend since June 2004.
The 19.00 level has now become the major pivot point for the long-term weekly trend and the stock has not yet given any reason to believe the trend is coming to an end.
Another rally above 19.00 should be expected if the indexes maintain their strength on Monday and Tuesday but the 19.16 level should act as decent resistance. Strong resistance will be found at 19.44. There is some minor support at 18.35 but it is from the 10-minute intra-day chart. There is no daily support until the 17.72 is reached.
Sales of GPS should be attempted on rallies above 19.00 and a stop loss placed at 19.54 (above the most recent high of 19.44). First objective is 17.72 but if the stock fails to break the downtrend on this rally it is likely to test its major support between 16.18-16.44.
My rating on the trade is a 7.5 (on a scale of 1-10 with the strongest probability rating being 10).
EPIC (Friday closing price 11.09)
EPIC is a stock that has been in an 4-year trading range between the $10 and $15 level. On Tuesday of this past week EPIC reported a loss in earnings and the stock broke from 13.22 down to Friday's low of 11.05.
Support starts at 10.90-11.05, then at 10.07, and major at 9.54. Based on the way the stock broke this past week it is possible that the $10 will be reached this coming week. Resistance will start at the breakdown point of 11.98, then stronger at 13.11-13.44, and then major at 14.00. Gap between 12.90 and 12.74 will be a magnet for the buyers unless the 9.54 level is broken.
Due to the clearly evident long-term trading range it is likely that when the lower levels of the range are reached that EPIC will be an attractive purchase.
Purchases of EPIC below 10.10 and using a stop loss at 9.44 and an objective of 13.11 will offer a 4-1 risk/reward ratio.
My rating on the trade is a 7.5 (on a scale of 1-10 with the strongest probability rating being 10).
ELN (Friday closing price 22.79)
ELN is a stock that has recently made a 30 month high and is close to closing a gap area at 26.50 that has been in effect during that period of time. The stock is also in a strong up-trend that shows no desire to stop.
ELN closed last week above the previous weekly high at 22.55 (closed at 23.02) and this past Friday confirmed the breakout with a second close above that level. There is no resistance, on a weekly closing basis, until the 25.60 level is seen. In addition, after making a daily closing high at 24.17, ELN has come back down to re-test the breakout level at 22.55 and so far has been successful at it. On Wednesday, and then again on Friday, the 20-day MA was tested successfully as well, and with the indexes showing strength at this time it is likely that ELN will continue its up-trend.
Major support is the 22.41-22.55 level. Resistance is minor at 23.51 and 24.17, stronger at 25.90 and major at 29.93-30.45. The gap area that has been in effect since February 2005 is at 26.90 and is a likely objective of this up-trend.
Purchases of ELN at Friday's closing price of 22.79 and down to 22.55 and using a stop loss order at 22.31 and an objective of at least 26.50 offers over a 9-1 risk/reward ratio. The support level is clearly defined and needs to hold if the stock is to continue its upward climb. This trade is with the trend, at an important support, on a 30-month breakout, and with a clearly defined objective.
My rating on the trade is 7.5 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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RMBS shows decent support at the 19.00-19.20 level and this past week stopped dropping when that price was reached. There is "minor" resistance between 19.40-19.60 but none after that until the 21.00 is seen again. Drops below 19.00 should generate a drop down to the 17.60-18.00 level. Direction for the week should be determined in the first two days of the week. HRB has reached the main objective of 21.40 and though it was able to get below that level it on a daily closing basis, it maintained itself above that level on a weekly closing basis. The chart does not show much more on the downside than an intra-day drop to 20.50 or on a closing basis 20.81. The upside now seems to be limited to 22.04. This is the probable trading range for this stock during this coming week. Covering of short positions should be considered if the stock trades below 21.00 again. SNDA closed above the 38.93 previous weekly close but below the 39.50 previous high daily close. On a weekly close chart basis there is no resistance now until the 41.17 level is seen. Any follow through to the upside on Monday with a daily close above 39.50 will likely take the stock up to that level. Using the 10-minute chart support should now be found at 39.00. If that level holds up it is likely the stock is going higher. A 39.60 stop close only or a 40.10 intra-day stop should be used but if the 39.00 level holds up you may want to consider simply getting out of the short. ABC had a reversal type day on Friday with higher highs and lower lows than the previous day. With the indexes having had a strong up day this kind of action is quite bearish to this stock. Using the daily closing chart the 44.50-44.70 level seems to be quite important. It seems to be a strong pivot point level and any close above 44.70 should generate a liquidation of the short position. Any close below 44.50 should generate a new attempt at the lows. CEGE has been in a well-defined downtrend since August and this past week the bears put the pressure on the stock to break. Nonetheless the daily closing support level at 3.36-33.37 was able to hold up throughout the week and still gives hope that the stock may recover. The trading range, on a closing basis, is now so small that its once again likely the stock will show some direction before the week is over. On a closing basis the 3.36 and 3.50 levels will likely determine what is to happen. A daily close below 3.36 will break a good support and put the stock under more pressure. A close above 3.50 will likely generate buying at least up to 3.73. A break of 3.75 will be a buy signal. WOLF was not able to close above the 13.09 level on Friday in order to give a buy signal but it was able to re-test the lows one more time and give more strength to the support level. A daily close above 13.25 is needed to re-generate buying interest. Support should now be found at 12.85 and again at 12.66. NTES held below a strong weekly resistance level between 20.00 and 20.44. On Wednesday NTES did get down intra-day below the 19.00-19.20 daily closing support level but the lowest daily close was 19.56. Resistance should be found intra-day at 20.29-20.37 and on a daily closing basis at 20.09. Any close above 20.09 could re-generate the buying interest. A close above 20.09 should be a reason to take profits on the short position. The 21.29 level, on a closing basis, continues to be major resistance.
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1) PMCS - Averaged long at 7.90. Stop loss raised to 8.70. Stock closed Friday at 9.19.
2) ABC - Shorted at 46.06. Stop loss at 46.06. Stock closed Friday at 44.66.
3) CEGE - Purchased at 3.60. Stop lowered to 3.16. Stock closed Friday at 3.37.
4) NTES - Shorted at 21.48. Stop loss at 21.33. Stock closed Friday at 19.92.
5) SONS - Liquidated long positions at 7.02. Loss on the trade of $37 per 100 shares (5 mentions) plus commissions.
6) PAAS - Shorted at 29.58. Covered short at 29.82. Loss on the trade of $24 per 100 shares plus commission.
7) PAAS - Shorted at 31.10. Stop loss at 32.34. Stock closed Friday at 30.87.
8) MWA - Liquidated long position at 11.33. Loss on the trade of $88 per 100 shares plus commission.
9) HRB - Shorted at 22.46. Stop lowered to 22.23. Stock closed Friday at 21.88.
10) WOLF - Long at 13.82. Stop loss changed to 12.09. Stock closed Friday at 13.07.
11) SNDA - Liquidated short position at 32.98. Profit on the trade of $562 per 100 shares minus commission.
12) SNDA - Shorted at 35.91. Stopped out at 36.93. Loss on the trade of $102 plus commission.
13) RMBS - Shorted at 21.49. Stop loss at 22.10. Stock closed Friday at 19.32.
14) SNDA - Shorted at 38.93. Stop loss at 39.60 stop close only. Stock closed Friday at 39.37.
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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