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Issue #52 
December 30, 2007 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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| Happy New Year to All!
Direction for the year to be determined soon!
DOW Friday close at 13366
The DOW finished the week without a clear clue as to what it plans to do after the holidays are over. On Friday, the index broke below all the MA's (20, 50, 100 day), in direct contrast to breaking above all of them the previous week. This type of action is a clear statement that the market has no direction and is waiting for the New Year, when a full complement of brokers and investors are back as well as a new round of monthly reports, to make a decision.
The only thing that can be stated, with any degree of certainty, is that the price action in December did not result in any breaks of important resistance levels which might signify that the bearish action of the past few months has been negated. As such, I must assume that the probabilities favor a resumption of the downtrend, which was in place in November.
Major resistance on a weekly closing basis continues to be 13668. On a daily closing basis the resistance levels have changed. Major resistance will now be 13727, but decent resistance will now also be found at 13552. Breaking above the 13727 level, on a daily closing basis, would likely generate a test of the 14000 level. Support, on a weekly closing basis, is major at 12981. There is some minor support at 13079-13113. On a daily closing basis the 13212-13250 will continue to be very important, but more importantly the 13167 level now becomes somewhat pivotal. A break of that level would likely take the stock down to re-test 12846.
In looking at the daily closing chart, I believe the two critical levels are now 13727 and 13167. Each of those two levels would likely generate an additional 300-point move and, more importantly, give either the bulls or the bears the upper hand. Trading within that range, though, is likely to be the reality for the first 2 weeks of the New Year.
NASDAQ Friday Close at 2674
On Wednesday the NASDAQ generated a close that could have been a major short-term buy signal. On Thursday and Friday, though, it failed to confirm the buy signal and reverted back to a sideways to down market with the major resistance still basically intact.
The NASDAQ has built a clearly evident bearish head & shoulders formation on the daily and weekly chart. The left shoulder is at 2720, the head at 2810, and the right shoulder at 2719. Neckline is down at 2575. On Wednesday of last week, the NASDAQ was able to generate a daily close at 2724 (a few points above the right shoulder) and should there have been follow-through to that close (another close at 2724 or higher), the formation would have likely been negated and a strong rally would have ensued. The failure to confirm the breakout has left the index still under pressure and still in risk of a major drop in price should the neckline be broken.
Major resistance, on a daily closing basis, remains at the 2720-2724 level. There is some important support at 2654-2670 (previous minor low, 2 previous highs, and the 20 and 100-day MA), and more support at 2620. Major support is now at 2574. Should that support break it would also mean a break of the neckline of the head & shoulders formation and an objective of the mid to low 2300's.
The low on Friday at 2674 seems to be quite short-term pivotal. A break of that level, will not only break the 20 and 100-day MA but will generate a close of the gap down at 2641. In addition, such a break would put the index back into a defensive mode that would require some positive fundamental news to negate.
Overall, the chart of the NASDAQ looks heavily tilted toward a downside break. In addition to the head & shoulders formation, the weekly chart also shows an inverted flag formation. A break below 2540 would offer an objective of 2220.
It is likely that the NASDAQ will trade between 2720 and 2575 for the next couple of weeks but a break of either level, on a daily closing basis, will likely generate strong follow through.
One last note with the NASDAQ. The failure to follow through on last Wednesday's mini breakout will weigh heavily on the index this coming week. It is now likely that without some strong fundamental news to re-start the upside, that the NASDAQ will be under selling pressure this coming week.
S&Poors 500 Friday close at 1478
The SPX chart is almost identical to the DOW's with one important difference. Previous low weekly and daily closes have held up strongly as resistances, contrary to the ones in the DOW. Previous low closes are not normally as strong as previous high closes. In most cases, when previous low closes are successful in holding down rallies, it means the index is showing strong signs of weakness.
Resistance continues to be very strong at 1505 on a weekly closing basis and at 1518 on a daily closing basis. Support is now at 1460 on a daily closing basis and at 1452 on a weekly closing basis. Two gaps continue to be open at 1447 and at 1429. A daily close below 1446 would likely generate strong selling and put the index totally on the defensive.
Likely trading range for the next 2 weeks is 1450-1500. Movement above either of those two levels will likely be indicative.
It is likely that trading next week will continue to be somewhat choppy and within the sideways trading parameters outlined above. Nonetheless, I do believe that by the end of the week some minor clue as to the direction for next month will be given. Expect some volatility to be seen and, even perhaps, small incursions above or below minor resistance or support levels, without breaking any major ones. In simple words, "head fakes".
Nonetheless by the second week, all indexes should be showing definite signs ot a short-term trend, albeit to be decided whether it will be the upside or the downside. Generally speaking, though, the probabilities still favor the downside.
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Stock Analysis/Evaluation
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CHART Outlooks
This is a tough week, much like last week, for stock mentions as the indexes will be a deciding factor over the next couple of weeks. With the possibility of volatility being present, great care should be used regarding entry points and stop loss placing. Only stocks with clearly defined weekly trends will be used this week.
RECN (Friday Close at 18.25)
RECN has been in a downtrend of some magnitude for the last few months as the stock has fallen from a high of 36.21 on July 16th to a low of 17.26. A week ago, RECN posted second quarter profits below Wall Street expectations and in the early morning trading that day, it was down over 10% in value. RECN began its strong drop on Sep 24th from a high of 29.90, after 5 analysts lowered their rating on the same day.
A week ago, RECN reached a major level of weekly support between 17.05-17.70 and showed spike bottom action. After the earnings report, the stock got as low as 17.26 and thereafter was able to rally up to 18.88 intra-day before closing out at 18.28. The spike bottom action as well as upward intra-day movement suggests that the stock may have found a bottom and may be in for at least a short-covering rally. This past week the stock continued its downward slide by closing once again on a new 52-week daily closing low.
There is very evident support in the weekly closing chart going back to Aug 2004 between 17.05-17.70, The intra-week low in May05 was 17.40 and the intra-week low in Aug04 was 16.23. In looking at the chart these two support level loom very strong and will be difficult to break, especially since all the bad news is already out and the stock finds itself is a very oversold condition. On the upside there is no evident resistance level of consequence until the 22.79 level is seen. That resistance level is considered minor but is also a major previous low, which means it is not likely to break unless the fundamentals change.
Purchases on RECN between 17.05 and 17.71, using a stop loss at 16.95, and an objective of 22.79 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).
CAT (Friday close at 72.77)
CAT has been in a 6 month downtrend that has not yet given a buy signal, on a weekly basis, that the trend has changed. The stock has been backing and filling for the past two weeks waiting for whatever direction the indexes will take for the New Year. Since the trend has been consistently down for the past few months, the probabilities still favor continuation of the trend.
There is very decent resistance at 74.65 from the 100-day MA as well as from several previous weekly closing highs. The resistance is also strong at 75.00 and 75.98 (intra-day) and then major at 76.58 on a weekly closing basis (77.22 intra-day). A close above 76.58, on a weekly closing basis, would signal that the weekly downtrend is over. Support is strong at 72.64 and even stronger at 70.84-70.95, on a daily and weekly closing basis. Below that support level you would need to get down to the mid 67's' to find the next important support.
Based on the fact that the stock is still in a very well defined downtrend and the resistance at 75.00 is not only strong but has been pivotal in the past, the short side of this stock seems to be the most attractive
A sale of CAT at 74.98, using a stop loss at 76.08 and an objective of 67.50- 68.50 will offer a risk/reward ratio of at least 6-1. Possible objective, if the downtrend is intact and the previous low at 67.00 does not hold up, would be 62.00.
My rating on the trade is an 6.5 (on a scale of 1-10 with the strongest probability rating being 10).
CHB (Friday closing price 9.35)
CHB reached a high of 16.50 in May 2006 and then proceeded to drop all the way down to 5.04 by August 2006. The stock then proceeded to launch a new rally that culminated with a high of 14.59 in October of 2007. From October to December 3rd the stock dropped back down to 8.08 in a semi dramatic fashion. During the past few weeks CHB has traded in a range between 10,30 and 7.84 and built what seems to be an inverted flag formation that if broken, a drop below 7.84, would give an objective down to $4.00.
There is very strong and evident resistance up at 10.30. In addition to several important highs at that price, the 20, 50, and 100 week MA's are all converging near that price. Support, on the daily chart is seen at 8.80-9.05. A break of that support would take it down to the recent low at 7.84. Below that there is some support at 7.19-7.50 and then nothing until 5.04.
The main reason for the short trade is the very evident and strong resistance at 10.30 and the also evident inverted flag formation. Even if the flag formation is not fulfilled the probabilities of this stock getting down to the 7.50 level are quite strong.
A sale of CHB at 9.75-9.90, placing a stop loss at 10.40 and having an objective of 7.50 would offer a risk/reward ratio of over 4-1. Should the flag formation be effective and a drop down to the $5 or even lower at $4 happen, the risk/reward ratio would soar to over 10-1.
My rating on the trade is a 7.5 (on a scale of 1-10 with the strongest probability rating being 10).
FCEL (Friday closing price 10.32)
FCEL is a very interesting stock in the alternative fuel industry that gapped up recently above an established resistance level at 10.59 and within two weeks (Dec 11th - Dec 21st) reached a high of 13.14. The stock has been in a weekly up-trend all year as it began 2007 trading at 6.00. Last Monday the stock gapped down due to a report that a contract with the state of Connecticut was less than what was expected and by Friday reached a low of 9.50 and hit the 100-day MA at that price. Comments from the FCEL message board seem to suggest that the news was not negative and that the drop has been way overdone.
Major support on the weekly chart is down at 8.50 and there is good support from important previous high weekly closes at 10.00. In addition, there is a large consolidation area of support between 9.00 - 10.00 which seems likely to hold any further weakness should it come. There is some resistance between 10.40-10.59 but above that there is absolutely no resistance until the 13.14 level is seen. The gap left between 11.20 and 12.12 will likely be a magnet, as the news that caused the drop does not seem to be substantial enough to keep the stock down.
The weekly trend is evidently up and no damage to the chart was sustained with this recent drop in price. Trading around the $10 level is probable for the next day or two and then an attempt to close the gap should ensue. The spike-type action on Friday and the close near the highs of the day should generate some confidence in purchasing the stock on dips below $10.
Purchases of FCEL between 9.79-9.98 and using a stop loss order at 9.40 and an objective of 12.57 will offer a risk/reward ratio of almost 6-1.
My rating on the trade is a 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 was able to hold on to the gains it generated a week ago. On Friday, when the stock market was showing weakness, UIS went down to the 20-day MA at 4.90 and held itself above it. If the stock is able to hold above the 20-day MA this coming week and generate a move above 5.24, it should have another spike rally up to the 6.00 level very shortly. The 4.90 level is short-term pivotal, though, as it will decide whether the stock in going through a base building process (likely to take a couple of weeks) or whether a strong short term pop will happen. If the 20-day MA does not hold up then a drop down to 4.56 could be seen. That drop would not be bearish but simply a signal that the stock is going through a base building stage with some backing and filling needed to be done for a couple of weeks. Either way, I do believe the stock has now found its bottom and a rally is likely to ensue. Time frame of such a rally is the only question left to answer, in my opinion. SONS continues to be under pressure and has not yet given any kind of a buy signal. Nonetheless, there is little room to the downside left so a decision on the future of the weekly trend is near at hand. The spike low at 5.62, made last week, should be indicative that the stock is ready to make a change in the recent downtrend. The re-test of that low with a drop on Thursday down to 5.77 should set up the stock for a rally this coming week. The 20 and 100 day MA are getting ready to cross and that should stimulate some action. Key price of that cross is 6.20. A daily close above 6.20 should generate positive action. Any further weakness at this time will likely be negative to the overall outlook of the stock. BEAS seems to be stuck in a narrow trading range without any kind of direction. A wedge formation seems to be forming and if that is the case a breakout on either direction would likely be strong. A break above 16.18 or below 15.05 will likely generate a fast short-term move of $1.40. Stops should be lowered to 16.24. Probabilities continue to favor slightly the downside. SNDA, with the drop back down to 32.60, is once again looking weak. The chart is showing the probability of further breaks rising. With Friday's close being below 32.95 the chart now shows that the stock will likely be testing the 31.00 level soon, on a daily closing basis. The weekly chart, though, does not look all that negative as Friday's close was at a support level of consequence seen several years ago. Unfortunately the weekly chart only comes into play on Friday's and intra-week action means nothing. The 32.56 level continues to be strong support, though, and if the stock can rally above 35.39, then it will likely hit my 37.30-38.30 objective. In looking at the 10-minute chart, the 33.19 level is a pivot point and if the stock can get above 33.50, it will likely continue to move up. TXN hit both the 20 and 50 week MA two weeks ago and Friday's close continued to keep that resistance level in play. The stop loss at 34.70 should now be moved down to 34.51. Be sure to have an actual stop loss (not mental) as the level is pivotal. Support on a daily closing basis is down at 33.05 and then stronger at 32.32. Likely trading range for the week is 34.41-32.82. Any move above or below those levels will likely generate strong follow through. Chart is slightly tilted toward the bull side. RX has a chart that is still heavily tilted toward the downside. The action last week did not do anything to relieve that condition. A drop down to the 21.18 level is still expected. The stop loss order at 23.60 is perfectly placed and should not be a mental stop loss. Resistance at 23.40 is strong.
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1) UIS - Averaged long at 4.93. Stop loss at 4.32. Stock closed on Friday at 5.00.
2) SONS - Purchased at 6.06. Stop loss changed to 5.55. Stock closed on Friday at 5.88.
3) SNDA - Purchased at 33.45. Stop loss at 32.45. Stock closed on Friday at 32.67.
4) BEAS - Averaged short at 16.655. Stop loss at 16.58. Stock closed on Friday at 15.86.
5) CAT - Covered short at 73.69. Loss on the trade of $73 per 100 shares plus commission.
6) TXN - Shorted at 34.19. Stop loss at 34.51. Stock closed on Friday at 33.49.
7) RX - Shorted at 23.28. Stop loss at 23.60. Stock closed on Friday at 22.80.
8) NUAN - Shorted at 18.96. Stop loss at 19.67. Stock closed on Friday at 18.53.
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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