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Issue #45 
November 11, 2007 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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| Indexes now in a downtrend!
DOW Friday close at 13042
The close on Friday signaled that the DOW is now in a downtrend (no longer a sideways trend) and will need strong fundamental changes to reverse the trend.
The close on Friday was the lowest weekly close since April 16th and that includes the week when the DOW dropped down intra-week to 12517. The fundamental picture must be considered worse and means the 12517 level is now in jeopardy of being tested and taken out.
On Friday the DOW, and several components of the DOW (JPM and C for example), tried to rally late in the day (above intra-day resistance on the 10-minute chart) but were unable to maintain the rally and closed near the day's lows. A definite sell signal was given with the failure and close below major supports.
The 13079 level on the DOW, on a weekly closing basis, had been the lowest close since April. On Thursday and Friday the DOW pivoted at that level on several occasions.
The close on Friday must be considered a break of the weekly support and will likely generate strong selling next week unless some positive fundamental news is seen. The bulls will have a tough time generating rallies and will not likely be supported. The bears now have the upper hand and will likely push as strongly as they can.
The next support level on the DOW will be the previous weekly high close (12768) prior to the latest run-up above the 14000 level. Since it is a previous high and was pierced intra-day last time around (intra-day low of 12517 on Aug 13th) it is not considered a strong support now. It is likely, though, that a drop down to that level might generate a rally back up to the 13000 psychological resistance. Below that level the 12517 must be considered a support level but since it was not a support that took time to build it must be considered minor as well. The stronger support will be found at the 100-week MA at 12172 and from a double bottom on the weekly chart at 12112.
Resistance will now be very strong at 13371. Based on Friday's close that level has now become major resistance. Should the 13000 level be taken out next week (likely) it will also become resistance as well.
In looking at the chart I believe the DOW will be heading down to the 12200 level during the next few weeks. I don't see a lot of movement to the upside if Friday's break is confirmed with another close next week below 13079.
NASDAQ Friday Close at 2628
The NASDAQ had been the only index, prior to this week, not to give a previous sell or failure signal. That now has changed. The NASDAQ closed below the major weekly support at 2707 and gave a sell signal in the process. In addition a double top on the weekly charts now exists at the 2810 level. That double top will now loom large for many months to come.
There is no support of consequence until the 50-week MA is seen at 2566 so follow through to Friday's weak close is expected. At that level you will find the 50-week MA as well as two minor supportive weekly closes at 2558 and at 2566. That is a decent support level but by no means a major one. It might generate a short-term rally but unless fundamentals get better it is likely the NASDAQ will drop down to the stronger support seen at the 2500 area and break below the 50-week MA much like the DOW did this week.
That support level (2500) is going to be quite important. If it does not hold up, it is likely that a drop down to the stronger support as well as 100-week MA down at 2368 and 2400 will be seen.
Resistance in the NASDAQ will now be major at 2707. Not only from the break of support but also from a previous major weekly high.
S&Poors 500 Friday close at 1453
Like the DOW, the SPX broke below the 50-week MA on Friday but did not look as bad as the other two indexes. It is important to note that the SPX has been the leading chart indicator for the last year and therefore a key index to watch.
The SPX is the only index that is sitting atop a near-by support level at 1454-1456 (on a weekly closing basis). In addition, the SPX did not get down to the last vestiges of recent support (1432) like the DOW did with its intra-day drop down to 13021. This means that the action on Monday in the SPX may give a clue to what the indexes will do next week.
Support in the SPX is major down at 1433 (both intra-day and on a weekly closing basis) and that is the level that must be watched. Should that level break it will likely drop to the 1387 to 1407 level which must also be considered important support. That level is where the 100-week MA is currently trading at. In addition, at that level a double bottom on the weekly closing chart is also found. Below that, there is no support until the low 1300's are seen.
Resistance will be found at 1470 (strong) and then at 1490-1500 (major).
Because the SPX has been such a leading chart indicator and because of the proximity of important support, it is an index that is likely to paint a larger and longer term picture than any of the other two indexes. The three levels of consequence to watch closely are 1490-1500 on the upside and 1433 and 1387 on the downside. If the SPX is able to close below 1387 it is likely to head down into the low 1200's.
Overall Comment
What happened last week, with Friday's break of weekly support, is a statement that the indexes no longer have any buying strength and are on their backs. Such a situation will require long term fundamental solutions and not temporary patches. Confidence in the indexes has now eroded to the point that selling rallies will be the first impulse and not buying dips. As such, the market needs to be looked upon with bear eyes rather that with the idea that there are bargains to be had.
This coming week it is probable that the market will trend lower consistently, whether it happens in a panic mode of liquidation of long-term positions or with a gentler downtrend that includes small patches of buying coming in, is hard to gauge at this time. One thing that is now highly probable, the indexes are now in a downtrend.
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Stock Analysis/Evaluation
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CHART Outlooks
The indexes have now all given strong sell signals and short positions should only be considered this week. There will likely be consistent follow-through to the downside for the next couple of weeks and long positions will have a tough time making strides.
I will be keying a bit more this week on NASDAQ stocks as they are normally cheaper than DOW stocks and likely to be hit as well.
WIND (Friday Close at 11.21)
WIND broke out several months ago from a major congestion area around the $10 level and reached a high of 13.42 on Monday of last week. By the end of the week the stock had given a failure signals as well as a sell signal by closing below the 11.50 important support area.
Resistance will now be strong between 11.50-11.60, not only from the fact that the 11.50 level was the breakdown point but also from a previous important high at 11.61 that was seen prior to the breakout, Decent support is found at 11.00-11.17 but below that there is none of consequence until the $10 level is seen. The $10 level does show decent support as well as it being a psychological level but looking at the weekly charts, the failure to follow through to the upside and subsequent reversal shows that the 9.13 level as a probable objective and the 8.12 level as a possible one.
Sales of WIND between Friday's close at 11.21 and up to 11.48 and using a stop loss at 11.71 and an objective of 9.13 will offer a risk/reward ratio of at least 4-1. The key this week will be the 11.00 level as well as what the indexes do on Monday. A break of the 11.00 will increase the probabilities of reaching $10 by the end of the weak.
My rating on the trade is a 6.5 (on a scale of 1-10 with the strongest probability rating being 10).
SVNT (Friday close at 12.30)
SVNT has produced a major double top on the weekly charts that should generate a strong move down over the next few months. SVNT had been in a major up-trend since September 2006 from the $6 area up to 15.75. The double top is a major indication that the upside is over and creates a probability that the most recent weekly closing low at 11.49 will be taken out. A drop down to at least $10 could be seen, based on the bearish tone of the marketplace.
The most difficult thing with SVNT will be to find the right entry price where the risk can be limited and the profit potential maximized. This is a stock that at Friday's closing price will not offer a good risk/reward ratio so a rally must occur in order to short it. Such a rally may not come.
Resistance in SVNT is seen between 12.92 and 13.40 and a rally to that price would be a good entry location. If a rally does occur it is more likely that the 12.90-13.00 level of resistance will stand strong. There is quite a bit of support between 11.87 and 12.00 and unless the indexes are breaking down aggressively on Monday that level is likely to hold the first time around. Strong support is seen at 11.49 and major down at 10.92. Probable objective of the trade would be the 9.88 weekly low seen back May of the year 2000. If broken, though, drops down to the $6 level could be seen.
Sales of SVNT at 12.90 or better and using a stop loss order at 13.50 and an objective of 9.88 will offer a risk/reward ratio of 5-1.
My rating on the trade is a 7 (on a scale of 1-10 with the strongest probability rating being 10).
AOB (Friday closing price 11.87)
AOB is a stock I have shorted on several occasions over the past few months and have had mixed results (1 profitable trade and 1 losing trade). Nonetheless the stock seems to have found a strong top and gave a sell signal last week. It now looks like the probabilities of having a sustained down move are stronger.
The close below 12.05 on Friday was a break of major support on the daily chart and there is little support of consequence until the stock gets just below the $10 level.
Resistance is very strong at 12.90-13.13 but the break of major support at 12.05, on a daily closing basis, likely means that AOB will not be heading above that break down level unless the stock market shows some strength. There is some minor support at 11.14-11.32 but the stronger support is not found until the 9.30 level is reached. It must also be considered that the $10 level will be a psychological support. Should the 9.30 level break, the 8.52 and 7.11 levels would then become viable objectives. Those were my objectives the first time I shorted the stock.
Sales of AOB at Friday's closing price and up to 12.05 and using a stop loss order at 12.30 and an objective of 9.30 will offer a risk/reward ratio of at least 7-1. If stopped out of the trade at 12.30 you could attempt to sell the stock again at 12.90 and place a stop at 13.23 with the same objective. Should the stock market be as weak as I expect it to be, it is quite likely that AOB would be heading down to the 8.52 or 7.11 levels thus raising the risk/reward ratio substantially.
My rating on the trade is a 7.5 (on a scale of 1-10 with the strongest probability rating being 10).
BEAS (Friday closing price 16.90)
Shorting BEAS is not a high probability trade but the risk/reward ratio makes it very attractive. BEAS recently broke out of a 5-year high at 14.11 and rallied all the way up to 18.94 before finding any selling. The stock still looks very strong on the weekly chart but the daily chart is starting to look weak and could be giving a failure signal this week if the indexes continue to go down.
The strongest indication that the stock is showing weakness is that upon the rally reaching up to 18.94 the stock gave up almost 50% back of the rally it had. In addition, the stock gapped down two weeks ago and even though there have been repeated attempts to close the gap it has not been able to do so. That fact in a bullish market is a strong negative. One more negative sign is that on the daily charts an inverted flag formation is seen and a break below the bottom of the flag at 16.50 would offer an objective of 13.90 and closure of the gap it left on the way up.
Resistance is now strong at the top of the inverted flag as well as the gap area at 17.32, There is no support of consequence until the 13.07 level is seen.
Sales of BEAS at Friday's closing price of 16.90 and using a sensitive stop loss at 17.60 and an objective of 13.90 will offer a 4-1 risk/reward ratio. Positions can and should be added should the 16.50 level break. If stopped out a short trade would no longer look viable.
My rating on the trade is 6 (on a scale of 1-10 with the strongest probability rating being 10). Should the 16.50 level break the rating would increase to an 8.
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Updates
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| Updates on held stocks
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Open Positions and stop loss changes
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RMBS was at a loss as to what to do on Friday. Faced with a bullish piece of news regarding a new relationship with Intel and the weakness in the stock market, RMBS decided to play it cute and wait until next week to see what ensues. One thing that is seen on the chart is that the trading range, on a daily closing basis, has narrowed substantially with the 20-day MA now at 19.91 and the 50-day MA at 19.07. A break of either area, on a daily closing basis, will likely generate substantial follow through. Due to my bearish outlook on the indexes I would think the downside is where the stock will go. NUAN closed on Friday below the 20.32 level and gave the first sell signal in many months. In addition, it closed below an important daily close at 20.11 and broke below the 50-day MA as well. There is no support of consequence until the 18.20-18.28 level is seen and therefore if the indexes are not able to rally, NUAN is likely to be heading down to that price. There is some support from the 100-day MA at 18.50 and that level may just hold up since the stock has such strong fundamentals. One thing that does need to be mentioned is that if the indexes drop strongly and NUAN is unable to hold up above 17.90-18.20 level then the objective on the downside would become the $15 level. HRB has surpassed the objectives on the downside but may still give more if the indexes continue to break. The 18.28 and 18.84 levels, on a daily closing basis, are very important for HRB. On an intra-day basis the 18.00 level signifies the lowest price seen since 2003 and if broken would open up new scenarios with the $16 level being the first objective. Right now, though, it does look like HRB is trying to hold on to the lower supports and based on the action this past week the probabilities are decent that it will. MMM seems to be in free-fall when looking at the weekly charts. The close on Friday was below the 100-week MA and the supports are not considered strong until the 76.21 level is seen. From there on down to 68.53 the supports get progressively stronger. At 79.51 the stock looks quite weak. My thinking is that MMM will reach the $76 dollar area sometime this coming week and will begin to have bounces from that level, but with a bearish tinge. Ultimately (a few months) it is possible that MMM could get as low as the $70 level. At that time it would likely become a strong buy. There is a gap between 77.51 and 79.23 that is an immediate objective and likely to be filled on Monday. There are no close-by resistance levels on the stock but if I had to come up with one I would say 81.95 is the only one that qualifies. C gave the first indication that is it trying to bottom out but in looking at the weekly charts you have to go back to 2003 to find any kind of support. That support is at 32.90 and that price definitely came into play on Friday when it closed there. The support at 32.90 is not considered major and if the indexes continue to break this week it is likely that C will continue to head lower. There are quite a few minor supports on the way down, on a weekly closing basis, starting with 32.90, 31.59, 28.82, and the major one at 26.83. It is still to early to give you an idea how low it will go but based on Friday's action I would have to say that the 34.47 high seen on Friday will be resistance now. CAT looks quite bad on the daily chart as there is no support of consequence shown. Nonetheless when looking at the weekly chart there are several things that pop up. CAT is presently right at or right below the 50-week MA and the 100-week MA is currently at 70.00. Nonetheless, other than the MA's, there is no support until the 67.52-69.08 level is seen. Should that level break there is nothing of consequence until 63.04. The 72.64 level, on a closing basis, will now become major resistance as that was the support level of great consequence that was broken this past week. CAT does show a breakaway and runaway gap that are now in danger of being closed. The breakaway gap is at 67.76-68.08 and the runaway gap is at 68.93-70.71. Already on Friday CAT got close to closing the runaway gap and due to the weak close the likelihood of that gap being closed is strong. Should the first gap be closed the probability of the second one being closed increases strongly. JPM tried very hard on Friday to reverse the break it had of the weekly charts by attempting to rally and close above 43.53 on a weekly basis and above 43.00 on a daily basis. It failed. The next support level is, on a weekly closing basis, between 40.16 and 40.89. This is a major support level when looking at the 10-year chart. The $40 level has been a major high or major low on 4 different occasions during that period of time. It is a level that must be seriously considered as the main objective and, when reached, serious consideration to taking profits should be used. INTC did give a sell signal last week as it broke below several recent supports. Nonetheless the $25 level is a very strong support and with the recent fundamental bullishness in INTC the level will need to be closely monitored for profit taking. Should the 24.85 level break, on a daily closing basis, the 23.15 level would become the next objective. In addition, should INTC close out the week below the 25.00 level then a possible objective of $20 would come into play. Resistance will now be strong at 26.35-26.38. The key is likely to be how the indexes do this week.
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1) HRB - Short from 22.44. Stop loss lowered to 20.31. Stock closed on Friday at 19.00.
2) JPM - Shorted at 42.94. Covered short position at 43.64. Loss on the trade of $70 plus commission.
3) JPM - Shorted at 43.64. Stop loss now at 43.39. Stock closed Friday at 42.31.
4) CAT - Shorted at 73.72. Stop loss lowered to 72.87 stop close only. Stock closed on Friday at 70.41.
5) INTC - Shorted at 26.80. Stop loss lowered to 26.26 stop close only. Stock closed on Friday at 25.15.
6) MMM - Shorted at 83.88. No stop loss at this time. Stock closed on Friday at 79.51.
7) WOLF - Liquidated long position at 13.08. Loss on the trade of $74 per 100 shares plus commission.
8) C - Shorted at 38.70. Stop loss at 34.57. Stock closed Friday at 33.10.
9)) RMBS - Shorted at 21.49. Stop loss lowered to 20.35. Stock closed Friday at 19.50.
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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