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Issue #50 
December 16, 2007 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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| The Feds spoke and the markets reacted negatively!
DOW Friday close at 13340
The DOW, this past week, reacted to the news of the ¼% interest rate cut with a strong drop of 437 points. This happened shortly after the DOW had been able to get above and close above the 13691 resistance level which was considered to be "of consequence". The failure to follow through made the drop even more indicative as the bulls felt disappointment shortly after they had won a small battle.
There is very little left, in the way of news, that could give the DOW a strong reason to attempt to re-start the recent up-trend and therefore it seems likely that the index is in a sideways trend or back into a down mode. With the market entering into the meat of the holiday season it is also unlikely that any major moves, in either direction, will be seen during the next three weeks.
There will be, once again, strong resistance at 13659-13691 and strong support at 13210-13250. With the DOW closing on Friday right near the lows and below a previous weekly high close at 13379, it is likely that the index will be testing the support level first. Moves down into the mid 13200's are probable and another daily close, sometime this week, at 13250 is expected.
The 13250 is a strong key to the short term of the DOW. A daily close below 13250 will likely thrust the index to test the 13000 level once again. Should that happen, support, on a daily closing basis, will be decent at 12988. On a weekly closing basis (next Friday) strong support at 13079 and 13113.
Overall, the weekly chart looks weak and the probabilities still lie heavily that a major top has been formed and that the downside is the likely direction the index will take after the holidays. Also, in looking at the weekly charts, it seems probable that a re-test of the 50-week MA as well as the last support at 13079 will happen before any further consideration to renewing an up-trend could come. Such a re-test, if proven to be successful, could generate some decent technical buying.
Nonetheless if a break of 13079, on a weekly closing basis, were to occur only the 12961 would stand between that price and low 12000's.
I do not expect these weekly numbers to come into play over the next few weeks, as I believe the holidays will offer some short-term support as well as lower volume in trading. In addition, investors are expecting the usual January rally, so aggressive selling will probably wait until then.
NASDAQ Friday Close at 2635
The NASDAQ, unlike the DOW, was not able to close above its strong resistance this past week (2720 daily and 2707 weekly) and ended up creating a chart picture even more negative than the DOW's.
In addition, the daily close at 2719 (major resistance at 2720) seen on December 10th as well as the weekly close at 2706 (major resistance at 2707) seen on December 3rd, were almost picture-perfect, from a chart point of view. In using the weekly charts, the NASDAQ now has a double top at 2810 and now also has a couple of evenly placed shoulders, on a possible head & shoulders formation, at 2707. The neckline of this possible head & shoulders formation, on a weekly closing basis, is presently at 2597. A weekly close below that price will cause a break of the head & shoulders formation and give an objective of 2370. Head & shoulders formations are extremely rare but when seen, can often signify a major top in an index or stock.
On Friday, the second of two recent gaps (second gap at 2636) was filled. The first gap at 2586 is now a magnet with a high probability of being closed soon. The NASDAQ was able to hold at the 20-day MA on Friday but did close right on the lows of the day. If there is any follow-through weakness on Monday (expected) then the MA will be broken and an attempt to close the first gap will ensue. There is some support at 2620 and a small bounce could happen if it holds. Nonetheless, closing the first gap at 2586 is now a definite draw.
In using the daily charts, there will be strong support at 2584, so if the gap is closed and the support holds then a short-term rally will likely come thereafter. If that scenario comes to pass, it is likely that the NASDAQ will get into a trading range between 2584 and 2676, for the next few weeks.
The weekly chart looks ominous, as the stage is "perfectly" set for a strong fall should the formation be fulfilled. It is not likely to happen until the New Year as we are talking about the weekly chart and there are only 3 more weekly closes between now and New Years. Nonetheless, any weekly close (Friday's) below 2597 could signal a major drop in the indexes.
In using the daily chart, should the 2584 level break, the next support level would be 2541. Resistance should now be major at 2674 but should it break there is nothing until 2707 is seen.
It is a very bearish looking chart at this time. If the 2674 level of resistance were to break then some of the bearishness would disappear. Until that time, though, this is a chart that is ripe for the sellers to pluck.
S&Poors 500 Friday close at 1468
The SPX has even a more bearish chart scenario than the other two indexes as it failed to rally above a previous low weekly close of consequence. Normally, previous low closes do not offer major resistance but when they do it can be even more indicative of weakness.
In using the weekly charts, there had previously been major support at 1503-1505. When that level was broken back in July, it caused a drop in the SPX down to 1371. The index was then able to reverse its trend and generate a rally and new high at 1571. On the way down, once again the 1503-1505 level worked as support until it was broken in November. The drop thereafter took the index all the way down to 1406. With the recent re-test and close on December 3rd at 1505, and subsequent fall back thereafter, the resistance level has now become even stronger. With the close this past Friday below both the 20 and 50 week MA's it has now put the SPX into a very bearish scenario where rallies will be extremely difficult to generate.
There is decent support, on a daily closing basis, at 1463 and decent resistance 1488. A break of 1488 will likely generate a rally to 1497 and a break of 1463 a drop down to 1432. The weekly chart shows some minor weekly closing support at 1454 and then again at 1433-1441. Nonetheless a weekly close below 1433 would likely thrust the index down to the 1390-1400 level. A break of that level would likely be disastrous. On the upside, only a weekly close above 1505 would change the negativity of the chart.
It is my opinion that its likely the SPX will be heading down to the 1400 level sometime in the next 4-8 weeks. For the next couple of weeks, though, it is likely to be trading between 1454-1488 with a slight chance of a drop down to 1433.
With the Fed having made a somewhat weak statement with the lowering of the Fed rate only ¼% of a percent and the seemingly "ho-hum" reaction to the news of the Central Bank offering extra liquidity to the banks, it seems that the market will get back into a defensive stance with the sellers once again holding the better hand.
The holiday period will likely cause the overall participation and volume to drop down during the next three weeks and it's likely the traders will wait until the New Year before they trade the market aggressively once more. Nonetheless, at this time, if there is are no new fundamentals to change the general mood of the market, the indexes charts point to a downtrend now being in effect.
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Stock Analysis/Evaluation
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CHART Outlooks
It seems evident, based on the trading these past two weeks, that long positions are having problems holding on to their gains. With the market getting back into a sideways-to-down trend and the sellers once again seemingly back in control, short positions will likely be the most profitable.
HOKU (Friday Close at 11.30)
HOKU is a stock that generated a major rally starting November 26th when it was announced that the company had signed a contract, worth $306 million, to supply polysilicon to Solarfun Power Holdings. The rally started at 5.90 and within 13 days the stock reached a high of 13.53. The all-time high of the stock has been 14.55. A high made last year on July 16th.
Just prior to the announcement and rally HOKU had broken below a major support level at 7.50 which had been in effect for a period of 5 months. During that period of time the stock had been trading in a sideways range between $7.50 and $11.00. The break of that support level was very negative and signaled a probably move down to the $4.50 level. The news evidently caught the traders by surprise and generated the strong up move.
The rally up to 13.53 took HOKU to re-test the all-time high and, at this time, it can be said that the re-test has failed.
On Wednesday of last week HOKU took a one-day drop of $2. It was a signal that the recent rally has likely topped out. The drop took HOKU back down to re-test the breakout point of the sideways range the stock had been in for 5 months at 11.00. Resistance will now be decent at 12.30 (12.08 on a daily closing basis) and very strong at 12.80. Support will be found at 11.00 from previous highs. Below that level there is no support until 9.02 is seen.
The fact that the stock took a $2 drop in one day last week and that a failed re-test of the highs exists, opens up the probability that HOKU will get back into a sideways trading range. It is probable that the stock will have to build a strong support base from which to attempt any further upside movement. At this time there is no strong support base other than previous highs. Previous highs are not normally considered strong supports. In addition, the fact that the company will not begin to receive any income from the contract it signed until 2009 means that speculation will likely continue to rule until it becomes reality.
All the MA's (20, 50, 100 day and 20 week) are currently around 9.00. If the 11.00 level of support from previous highs breaks, that level would be the main objective. Though major support is down at 7.50 it seems unlikely at this time that the stock will get down that low.
Sales of HOKU at Friday's high of 11.79, placing a stop loss at 12.40 and an objective of 9.00 will offer a 4-1 risk/reward ratio.
My rating on the trade is a 6.5 (on a scale of 1-10 with the strongest probability rating being 10).
NUAN (Friday close at 19.00)
NUAN this past week received news that a secondary offering of 15 million shares was going to be offered. The news was received negatively by the marketplace and the stock gapped down below an important support level at 19.43. In addition, over the previous weeks, NUAN has given indications that a top has been formed and now a double top exists at 22.50, as well as a double top on the weekly closing charts at 21.49. The stock seems to have shown that a temporary top is now in existence.
On Friday, the previous support level at 19.43 (now resistance) was tested repeatedly and failed to break. The stock subsequently closed on the lows of the day. During last week's action the 20, 50, and 100 day MA's were broken and the break was confirmed three days in a row. In addition, the 20-week MA was also broken, on a weekly closing basis, and that is the first time that has happened since March 2006. In looking at the daily chart, an inverted flag formation seems to be in place and a break of 18.81 would project a move down to 15.70.
Resistance is now very strong at 19.40-19.50 and again at 19.92 on a daily closing basis. Support, on a weekly closing basis, is minor at 18.23 and then stronger at 16.23. On a daily closing basis support is strong at 18.58, stronger at 18.00, and then nothing until the 16.00 level is seen.
NUAN has been a favorite stock of many investors as the company is considered one of the leaders of voice recognition software. Nonetheless, the company has embarked in an acquisition spree that has increased their debt ratio and the news of a secondary offering did not sit well with the investors. With the topping out action the stock has seen over the past few weeks and the recent news as well as the chart action, NUAN looks like a good trade on the short side as the resistance levels are clearly defined and the risk is small.
Sales of NUAN at Friday's closing price of 19.00 and up to 19.30, with a stop loss at 19.79 and an objective of 15.70-16.00 will give a risk/reward ratio of at least 4-1.
My rating on the trade is a 7 (on a scale of 1-10 with the strongest probability rating being 10).
CAT (Friday closing price 73.39)
CAT is a stock I recently mentioned as a short position a few weeks ago. The rally in the indexes caused me to liquidate the short position (fortunately at a profit) and wait for another re-entry into the stock, once again as a short. The subsequent rally up to the 77.27 was the expected result of the index rally but now that the indexes have given a failure-to-follow through signal, CAT once again is an attractive candidate for a short position.
Resistance should now be strong at 75.00 from several previous daily highs as well as the 100-week MA. Further resistance will be found at 75.98 and 76.89. On the weekly charts, the 20-week MA as well as a strong previous high is found at 75.03. It is unlikely at this time that CAT will be able to close above 75.03 on a weekly closing basis (Fridays). Strong support should be found at 71.63 from an important previous low as well as the 20-day MA. Further support at 70.59 and major at 67.00. On the weekly charts there is decent support at 72.64 but below that there is nothing until 68.73 is seen.
The chart seems to state that CAT is in a weekly downtrend with a probably objective of 62.00 sometime over the next few months. It is unlikely, under this scenario, that CAT would be able to close, on a weekly closing basis, above the most recent weekly high close at 75.03. In addition, the downtrend is unlikely to change until the previous low weekly close is tested successfully. At this time, the weekly low close is 68.73.
Sales of CAT between 74.77 and 75.00, placing a stop loss at 76.10 and having an objective of a minimum of 68.73 will offer a risk/reward ratio of 6-1. Possible objective, if the support at 68.73 does not hold up, would be the 62.00 level. Such an objective would offer a risk/reward ratio of over 12-1.
My rating on the trade is a 7.5 (on a scale of 1-10 with the strongest probability rating being 10).
SVNT (Friday closing price 18.90)
SVNT rallied aggressively this past week due to the positive results of its Phase lll clinical trials regarding a medicine that helps gout sufferers. The stock jumped up in price over $4 right after the report. Companies that have medical products that have undergone and passed all clinical trials with the FDA, can expect large long term profits from their product. Often the difference between Phase ll and Phase lll results can be as much as $10 and $25 in the value of the stock.
The stock gapped up from 14.46 to 16.32 and proceeded to reach 19.40 the day after. There was already one intra-day re-test of the 16.32 level with a subsequent drop the next day to 16.78. The gap area at 16.32 will likely act as strong support as it should be aggressively purchased if and when it gets back down to that price. There is no resistance whatsoever as the prices seen on Thursday and Friday are all-time highs. On Friday the stock did show a bit of reluctance to stay above 19.00 and if the indexes open lower as expected, SVNT might drop back down into the low 17's on Monday.
It is quite unlikely that market conditions will greatly affect a stock with positive Phase lll clinical results and therefore this is a stock that has a high probability of success as a purchase if the right entry price is achieved.
Purchases of SVNT between 17.00-17.30 and using a stop loss at 16.20 and an objective of $25 offers a risk/reward ratio of 9-1. If a more secure stop loss point is desired, you may want to consider placing the stop loss at 15.34. A reversal from the breakout point at 15.44 would be quite negative.
My rating on the trade is 7 (on a scale of 1-10 with the strongest probability rating being 10).
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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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UIS closed at a critical level on Friday. The lowest weekly close since 1991 had been 4.77. With Friday's close at 4.75 it puts the stock totally on the defensive. On a daily closing basis the lowest close during the same period of time has been 4.50. It is evident that both of these levels must hold if the stock is to build a bottom and generate any kind of rally. Resistance will now be strong at 5.14-5.20 on a daily closing basis. The 20-day MA is currently right around 5.00 as well. Any daily close above the 5.20 level will give a short-term buy signal. Support will be seen at Friday's closing price and then again at 4.50, on a daily closing basis. On an intra-day basis the stock recently had a drop as low as 4.56 and if the stock is bottoming out, that level should not be broken or if broken intra-day should generate an immediate reversal. This is a good area to buy this stock but no buy signal has been given so the rating on the trade is not great. SONS continues to look as if it wants to rally but the break in the indexes did not help this past week. Friday's close at 6.15 was right on the 100-week MA and the stock has not given any signals that it wants to break further. Strong support intra-day continues to be 5.88-6.00 and on a daily closing basis at 6.07 and 6.00. Resistance is now going to be found at the recent high daily close at 6.36. In addition, at that price, the 20 and 100 day MA's are also found. Strong resistance, on a daily closing basis, is still 6.42 and 6.58. A close above 6.36 will strengthen the chart and a close above 6.58 will give a strong buy signal. SNDA has also been building a strong top formation and the stock is now in going back down to test the support levels. There is a very evident support level at 35.50 on the daily closing chart but on the weekly closing chart the nearest support level is down at 32.71. With last week's close at 38.43 considered a re-test of the 39.46 weekly high close that has been in effect since December 2004, the chart is now looking like more weakness will come in unless there is a fundamental change in the company or in the stock market. A drop down to the 35.50 level is likely to be seen this coming week. The short position is looking strong. BEAS failed to confirm continuation of the recent downtrend when it was able to rally on Friday from its lows of 15.16 to close above the 15.47 level which is support on the weekly closing chart. The close at 15.58, with the indexes all closing near the lows of the day, throws a question mark on the continuation of the recent weakness. Objective is still closure of the gap at 14.10. The 100-day MA is currently at 14.46 and that line might act as support.
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1) UIS - Purchased at 4.87. Stop loss at 4.32. Stock closed on Friday at 4.75.
2) SONS - Purchased at 6.06. Stop loss at 5.78. Stock closed on Friday at 6.15.
3) BPHX - Liquidated long position purchased at 16.65 at 16.25. Loss on the trade of $40 per 100 shares plus commission.
4) SNDA - Shorted at 39.20. Stop loss at 40.10. Stock closed on Friday at 36.63.
5) BEAS - Averaged short at 16.655. Stop loss at 16.58. Stock closed on Friday at 15.58.
6) SCSS - Purchased at 9.98. Liquidated at 7.69. Loss on the trade of $229 per 100 shares plus commission.
7) INAP - Purchased at 9.94. Liquidated at 8.98. Loss on the trade of $96 per 100 shares plus 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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