With the indexes giving indications that a major top has been formed it is probably the time to be careful with long positions and consider leaning more toward short positions.

DIOD (Friday Close at 40.30)

DIOD is a stock that two weeks ago broke out of a 2 month trading range between 34.40 and 38.00. Since that breakout the stock has rallied and on Friday broke above a previous major high at 40.58 with an intra-day rally up to 41.13 but thereafter failed to close above the closing high of 40.40 thus giving a failure-to-follow-through signal. In addition, in looking at the weekly charts, the area between 40.40 and 40.63 has been previous resistance in the past and has come into play on at least on 5 different occasions over the years.

With the indexes likely to be in a corrective phase and DIOD having failed to maintain its breakout on Friday it is now likely that the recent breakout level at 38.00 will be tested. In addition any weekly close below 38.00 would weaken the weekly chart and open up the possibility of a move down to major support at 32.79.

The most probable scenario is that DIOD will be moving back down to the $38 level over the next week. Even though on Friday the stock saw a high of 41.13 the 40.58 level is likely to act as strong resistance as evident by a previous high and the intra-day action on Friday after the failure.

Sales of DIOD between Friday's closing price of 40.30 and 40.58 using a stop loss point of 40.70 and an objective of 38.00 gives a risk/reward ratio of at least 6-1. Possibilities of further breaks below 38.00 exist and therefore an objective of 32.79 is within the realm of plausibility.

My rating on the trade is a 6.5 (on a scale of 1-10 with the strongest probability rating being 10). The only reason for the lower rating is because of the stop loss point (within Friday intra-day trading range). If using a stop loss order of 41.23 the rating does increase to 7.5 but the risk/reward ratio decreases.

NTES (Friday close at 16.96)

NTES had a very negative day on Friday as it closed below both the lowest daily and weekly close since 11/17/2006. In addition, the close can be seen as a breakout from a weekly inverted flag formation and has a drop down to the $14 level as an objective.

There is no support in the chart until the $15 level is seen. That level is considered major support but the chart formation is such that a break of that level is possible.

With the previous low closes being between 17.05 and 17.20 it is unlikely that NTES will be able to get above that area and even more so close above that area. If it does then the breakdown would be considered a false breakdown and short positions would have to be covered. The only recent high green close has been 17.49 so intra-day rallies, should they happen, will likely run into strong selling at that price.

Sales of NTES between Friday's close of 16.96 and 17.05 should be attempted and a stop at 17.55 or a stop close only at 17.26 should be instituted. With an objective of 15.00 the risk/reward ratio is at least 4-1 with the possibility of a lot more.

My rating on the trade is a 7.5 (on a scale of 1-10 with the strongest probability rating being 10).

CLDN (Friday closing price 16.17)

CLDN is a stock that had been under a lot of pressure a few weeks ago but managed to stage a one day rally that broke above both the 20 and 50 day MA. Since that breakout CLDN attempted, over a period of 3 weeks, to extend the rally but ran into a mountain of consistent selling as it approached the $17 level and on Friday the stock broke below the 20 and 50 day MA and gave a new sell signal.

Support is layered starting at 15.83 and all the way down to 15.56 but the weekly charts show that since all the attempts to get above the $17 level as well as the 20 and 50 week MA the possibilities of a strong move down have increased. The weekly charts show support at 13.84, 14.67, and 14.92 so any and possibly all of those are objectives to the downside.

Though the profit potential is somewhat limited the stop loss level on this trade is quite clear and the risk/reward ratio within acceptable numbers. Sales of CLDN between Friday's closing price of 16.17 and 16.23 and using a stop loss order at 16.58 and an initial objective of 14.92 will offer a 4-1 risk/reward ratio.

WOLF (Friday closing price 14.47)

WOLF is a pick against what is happening in the indexes. This stock has shown a very evident breakout as well as closing on Friday at a very attractive price.

WOLF has been in a very well defined up-trend since October of last year. The last breakout from a consolidation area ran up over $2 and the breakout this time should have at least that much of a run, if not more, as there is no resistance on the chart until the $20 area is reached.

Since February WOLF has had two separate high weekly closes at the 14.45 level and using the daily charts that level has also shown itself to be extremely important. In addition, on Friday, WOLF got down near the 20-day MA giving the stock one more support level to use. WOLF is on a clearly defined breakout using the daily charts as it has been as high as 15.14 this past week and this dip down to test the breakout area should be seen as a buying opportunity.

Purchases of WOLF between the 14.47 closing price on Friday and 14.30 (the 20-day MA) should be attempted. Using a stop loss at 13.74 and an objective of the $17 level ($2.5 dollar move up) will offer a risk/reward ratio of 4-1. If you want to be more sensitive with the stop loss level it can be placed below the 20-day MA at 14.16 thus lowering your risk factor. With the breakout in place it is unlikely that WOLF will break below the 20-day MA.

My rating on the trade is a 7.5 (on a scale of 1-10 with the strongest probability rating being 10). The rating might even be higher if it wasn't for the indexes being in a corrective phase.