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Issue #67 
April 13, 2008 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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| Bull Hopes Dashed!
DOW Friday close at 12325
The DOW attempted to get up to and above the major resistance level up at 12743 with a rally on Monday up to 12734 but the attempt failed and the index backed off. For the next two days the DOW looked weak and on the verge of giving a sell signal but on Thursday the index rallied and seemed ready to try one more time. On Friday GE reported surprisingly lower earnings, that had some basis on the failed sub-prime mortgage industry, and that seemed to deflate the entire market as it meant the sub-prime mortgages are affecting even companies that are not in the financial arena. A very negative picture of the economy was once again brought to the surface showing that problems are likely running much deeper than anyone has previously anticipated. With such a picture drawn on a Friday and the traders not wanting to be long over the weekend, the index sold off and gave a new sell signal that reverberated everywhere.
The drop of 256 points on Friday was strong and the bullish flag formation the DOW had been able to build, with which to attack the resistance level at 12743, disappeared in one fell swoop. The spike drop seen on the chart on Friday looms difficult to overcome without some additional fundamental help, and that kind of help seems to be in very short supply. The chart picture is now back to being weak and bordering on dire, if the index cannot hold on to the supports underneath.
Based on the close Friday, near the lows of the session, it is probable that follow-through to the downside will be seen the first few days of next week and re-tests of the support levels underneath will occur. Nonetheless, the action on Friday may have been overdone as it was all based on the GE earnings report alone and with further earnings reports due out this week, the mood may change. If that is the case and the DOW is able to close on Monday above the 50-day MA at 12360 it might generate a rally up to 12462 in the first part of the week, and further attempts above 12600 thereafter. Should that happen, some of Friday's negative mood would ease.
The closest level of support is 12176 intra-day (12212 on a daily closing basis), below that 12099 on both a daily and weekly closing basis, and strong support at 11971. On a daily closing basis, tesistance will now be at 12554 and major at 12743.
The probabilities lie on the side of continued follow-through to the downside the first few days of next week and drops down to 12176-12212 will likely be seen. Nonetheless, that level is of some importance and will likely generate a bounce once reached, perhaps all the way back up to the low 12600's intra-day. With a 432 point range seen this past week, a possible low of 12182 and a high of 12620 could be seen this week, if the mood of the market does not turn somber.
It is possible the GE earnings will be considered a harbinger or more to come and if that is the case, the index, over the next few weeks, would likely get into wide trading range between 11600-12600 or…… the downtrend would resume and new lows will be made. It is still too early to tell.
At this time, and with only an initial reaction on how the earnings of GE relate to the overall market, it is difficult to give probability odds on what the index will do next week. The fundamental picture has gone from bleak to murky and now perhaps back to bleak and further earnings from other companies will probably need to be seen and evaluated before the chart picture clears up.
The only thing I do know is that the 12176-12212 level is a major pivot point and will help paint a better short-term picture of what this all means.
NASDAQ Friday Close at 2290
In some ways the chart picture in the NASDAQ has a bit more definition, in regards to support and resistance levels and does not look quite as short-term dangerous as the one in the DOW. The break on Friday in the NASDAQ did not come in the form of a spike and though it does show the probability of follow-through to the downside next week, the support level down at the 2253-2257 seems to be stronger than the one in the DOW has at 12176-12212.
The NASDAQ chart seems to show an index that is in a well-defined trading range between 2200 and 2400 with an inside trading range of 2350 and 2250, and unless the downtrend resumes, is likely to keep itself within that ranges for some time to come.
Support is strong down at 2253-2257, and again strong at 2200. Resistance is decent at 2350, again at 2364, and major at 2392-2400.
On Friday, the 20 and 50 day MA crossed at 2304 and with the close at 2290, it likely means a drop down to 2253-57 on Monday or Tuesday. Whether that level holds up will depend largely on how bearish the GE earnings report is judged by the marketplace as well as how bullish or bearish the earnings reports due out this week come out.
It is clearly evident on the chart, that if the 2253-2257 level is broken that the index is heading straight down to 2200 as no support of any consequence is seen between those two prices. A close on Monday above 2304 could and probably will generate a rally up to the 2347-2350 level. On a daily closing basis, there is some decent support at 2279 and the strong one at 2261. It is therefore not likely that the index will be strongly hit on Monday and could end up seeing a trading range between 2279 and 2320.
It is interesting to note that the NASDAQ did have two gaps that were probably being considered by the bulls as a breakaway gap and a runaway gap. The "runaway" gap between 2290 and 2304 was closed on Friday. The "breakaway" gap is down at 2201-2207 and is now likely to be closed as well, at some point in time.
As with the DOW, it is difficult to gauge how much the GE earnings report will affect the NASDAQ next week.
S&Poors 500 Friday close at 1332
The SPX also closed below the 20 and 50 day MA on the day the two indexes were crossing. Such a cross often is the harbinger of strong moves and the fact the index closed below the MA's on a spike down day, likely means further downside next week.
Many analysts have stated the index has found its bottom and have called for drops down to the 1325 level to be heavily supported. Based on the close at 1332 on Friday, those statements will likely be put to the test as early as Monday.
The weekly chart in the SPX does show strong support, on a weekly closing basis, at 1325 Since intra-week ranges are not important to the weekly close, it is necessary then to turn to the daily closing chart support to find the support underneath 1325. On the daily charts, support is very strong at 1311-1315 and therefore that level signifies a possible objective in the SPX for this week. It is highly likely the index will show strong support, at that price, the first time it is reached.
The 1360-1367 should now be considered strong resistance and under the present conditions it seems unlikely the index will be able to get above that level any time soon, on a daily closing basis, without some fundamental help.
As I have often mentioned before, the SPX always seems to be the leader on the charts and with major support, on a daily closing basis, being only 15-30 points lower, I would tend to think that the follow-through selling anticipated for Monday could be short lived. If it isn't, the indexes are in for a big fall.
A trading range this coming week could be 1311 to 1367. That scenario would fit in well with what happened back in the year 2000 where the index took three weeks of backing and filling action, showing lower highs and lower lows each week than the week before, before generating a strong move down thereafter.
The mood of the market fluctuated between positive to negative and back to positive, several times during the week but the news from GE seems to galvanized everyone toward a bearish scenario on Friday and even worse than what was being anticipated before. It no longer seems that rallies of "consequence" are expected. The question is everyone's mind now, is whether things will continue to get worse or simply stay bad. The earnings reports due out over the next week or two should clarify things somewhat.
Many analysts have stated recently that it was probable that the bottom of the downtrend had been seen, but now that analysis is starting to be questioned again, after Friday's bleak announcement. No clear answers will be found until further earnings reports are seen.
For the coming week, it is likely that the downside will be tempered as traders wait for further earnings reports for the first quarter to come out. It is therefore likely that the indexes will have small rallies every single time an earnings report is not as bearish as anticipated. Nonetheless, the traders will likely get back to selling all rallies until such a time that there is a positive fundamental change of consequence.
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Stock Analysis/Evaluation
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CHART Outlooks
The surprising earnings report from GE has destroyed the confidence that the marketplace had begun to generate over the past few weeks and has caused new fears to arise that perhaps things are worse than what anyone had anticipated. Such a lack of confidence is not supportive of long positions in the market except in exceptional situations. Rallies will again be aggressively sold and short positions should once again be considered as the path of least resistance.
ITG (Friday Close at 47.47)
ITG is a stock that has been on a general up-trend since May of 2007 when the stock got down to a weekly closing low of 37.39. The up-trend has had many peaks and valleys but overall the trend has been consistently higher and new weekly highs have been made on 3 different occasions. Nonetheless, since Oct06 the $50 level has been a major resistance level as the stock has gone up to that level of several occasions during the past year and not yet been able to close, on a weekly closing basis, above that level once.
A week ago Friday ITG was able to generate a new 20-month weekly high close at 48.37 and with the positive outlook the indexes had at the time, seemed ready to test and likely break the major resistance up at $50 and generate further upside. On Monday of this week ITG saw a high of 49.94 at the same time that the DOW was rallying up to 12734. It seemed likely that if the indexes would break above their resistance levels and that ITG would do the same. By Friday, and with the weak close seen in the indexes, ITG gave a failure signal with a lower weekly close that what had been seen the previous week (20-month high weekly close) and now seems it will likely mirror the index action over the next few weeks.
The big problem that ITG may now have, is that over the past 4 months it has been able to make a new weekly closing highs on 3 occasions but in each and every occasion, the new high was followed by a failure signal. The inability to generate a substantial rally after a new high is made is starting to weigh heavily on the stock as so many failures usually end up with a change of trend. In addition, the repeated failed attempts at a close above the $50 level is also making it evident that without some strong fundamental change or help from the indexes, the stock is not likely to accomplish further upside. One additional factor to be considered is that the 100-week MA started to turn down a few weeks ago and that has not been seen since 2002. It is now likely that in a few weeks the 100-week MA will cross below the 50-week MA and that "will" happen unless the indexes are able to generate a break of resistance (not likely now).
On the most recent move down at the beginning of March, the 100-week MA was tested successful when the stock closed, on a weekly closing basis, right on the line at 44.00. With the MA now turning down (presently at 43.75) and the third failure-to-follow-through signal having been given this past Friday, it now seems likely that another re-test of the 100-week MA could occur.
It is also possible (maybe even probable) that with so many failures to follow-through above the 48.00 level that the stock may be changing from an up-trend into a sideways trend and if that does happen, drops all the way down to the $37 could occur. A sideways trading range between $48 and $37, on a weekly closing basis, is becoming more likely every week.
Resistance intra-day is very strong at 50.23-50.35 and now very strong as well at 48.37 on a weekly closing basis. On the daily chart, resistance is found at 48.77 and at 49.45, on a daily closing basis. Some minor support is seen at Friday's close at 47.44 from a previous low close as well as the 50-day MA. Stronger support will be seen down at 45.94 from the 100-day MA as well as from a previous close of some consequence, and then again at 45.00-45.31. Using the weekly charts, there is some minor support at 45.31 and stronger support at 44.00. The 100-week and 200-day MA's are both currently around 43.78.
Sales of ITG between 48.72 and 49.50 and placing a stop loss on the trade at 50.04 and having a minimum objective of 43.75 will offer at least a 3-1 risk/reward ratio. Should be stock be able to close below 43.75, on a weekly closing basis, it is likely the stock will be heading down to the $37 level and the risk/reward ratio would climb to 8-1 or better.
My rating on the trade is a 6.5 (on a scale of 1-10 with the strongest probability rating being 10).
INTC (Friday close at 21.24)
INTC took a big tumble in December with the stock trading at 27.05 and by January 22 had seen the stock drop down to 18.05. The subsequent upward correction or short covering rally over the past 12 week has seen the stock get back up to the 22.45 level on two separate occasions and now shows a double top at that price. INTC has a very bearish formation on the weekly chart with a possible inverted flag formation being shown. In addition, the 18.05 low seen 12 weeks ago has yet to be tested and until that happens, it is not likely the stock will go very far to the upside.
INTC left, what looks like, a breakaway and runaway gap on the way down and the runaway gap is presently at 22.50. With the fact the stock has now gone up to 22.45 on two occasions and failed, as well as left a double top at that level, it seems highly unlikely the stock will be able to break above the price unless the indexes rally strongly or some fundamental change occurs.
Resistance is very strong at 22.45 intra-day and at 22.27 and at 22.08 on a daily closing basis. Support is found at 20.77 on an intra-day basis and at 20.79 and 21.08 on a daily closing basis. Strong support will also be found at 19.82-20.00, and then again at 18.63, on a daily closing basis. Using the weekly chart, it is also evident that starting at 21.87 and up to 22.29 the resistance is now likely to be major.
With the indexes back under pressure and the strong chart resistance seen in the INTC chart it seems unlikely that under the present economic conditions that the stock will be able to head higher. There is strong support at 18.63 but if the indexes get back down to their recent lows, INTC could break that support and head down to the $17 level where the 5-year support is seen.
It does seem likely that with last Thursday's rally up to the 22.45 level that one more rally and re-test of that level might be seen. A rally up to 21.82-22.18 could be seen if the indexes hold on to their support levels and generate a mid-week rally.
Sales of INTC between 21.82 and 22.18 and using a stop loss at 22.55 and an objective of 18.05-18.63 will offer a 5-1 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).
PDCO (Friday closing price 33.85)
PDCO is a stock that is particularly interesting to a chartist as the stock has recently shown a breakaway gap as well as a runaway gap with no fundamental news having been released. Such a chart formation is rare and is often indicative of a stock that is ready to go in the opposite direction strongly. In addition, there have been over 267,000 shares sold over the past 6 weeks by insiders and no purchases, other than acquisitions or options exercises at much lower prices. Such chart action, in conjunction with the insider selling, seems to be a strong sign that the stock is heading lower.
Back in November of last year, probably due to some negative fundamentals news, PDCO took a big fall from the $38 level down to the $28, in a matter of just a few days. The drop created a large gap area between 36.92 and 33.20 that looked imposing. Nonetheless, over the next 3 months the stock rallied and was able to close the gap but on February 28 much of the insider sales came in and a drop down to the 33.61 level was seen. The stock once again re-started the up-trend that saw it reach 37.78, 8 trading days ago.
Upon getting close to the $38 level from which the original drop began, the stock two days later gapped down from 36.92 down to 36.50 and three days later gapped down again from 36.04 down to 34.49 creating the breakaway and runaway gap scenario.
The breakaway and runaway gap scenario is a rare occurrence and can be very indicative of continued follow-through in the direction of the gaps for the next few months. In addition, such a formation has very clearly defined parameters, as a closure of the runaway gap will negate the entire formation. One additional reason for thinking the stock is heading lower is an open gap between 33.39 and 33.71 that should be filled as well as the stock having gapped below the 50-day MA on the last gap down.
Resistance should be quite strong at the 50-day MA as well as three previous intra-day highs seen back in mid January. All converge right at 34.79. The low of the runaway gap area should also be strong resistance and that is at 35.39. That price will be the stop loss level as well. Support is decent at 33.50-33.61 (33.68 on a daily closing basis) but if that level is broken, while trying to close the gap down at 33.39, there is no support of any consequence until 31.72 is seen. There is additional support using the weekly chart at 30.95 and then the last support of any consequence is down between 29.91 and 30.16. A break of that level would be quite negative.
It is possible that a rally this week to test the 50-day MA as well as the three intra-day highs at 34.79 will be seen before continuing to the downside.
Sales of PDCO between 34.50 and 34.79 and placing a stop loss at 35.38 and having an objective of 31.72 will offer a 4-1 risk/reward ratio.
My rating on the trade is a 8 (on a scale of 1-10 with the strongest probability rating being 10).
IR (Friday closing price 43.24)
IR is a stock that rallied from a low of 34.95 in Jul06 to a high of 56.66 in Jul07. After that major rally the stock got into a very strong and evident downtrend that culminated in Jan08 with a 4-year low at 34.46. Once that low was made IR saw a corrective rally, over the last 10 weeks, that seems to have culminated at 46.84 where a double top was built as well as a failed re-test of the gap area between 49.01-47.31 was left.
IR has not built a strong support base on the chart after the new 4-year low was made and seems prone to see a corrective phase to this recent rally. This 10-week rally seems to have culminated by failing to get into or close the gap that was left between 49.01 and 47.31. With the failed re-test it now seems highly probable that the stock needs to go back down to test the support level and try to build a base from which to attempt a new rally sometime in the future.
Resistance in IR is now major at between 46.58 and 47.02. There was a major high made at 47.02 back in May06 and two other weekly high closes seen this year at 46.69 and the most recent at 46.58. In addition, within the last 2 weeks, the stock has gone up to 46.79 and 46.84 on two separate occasions and now has a double top in place. With the indexes now being once again under pressure, it seems highly unlikely that IR will be able to get above that resistance level without some major fundamental change occurring. There was/is some decent support on a daily closing basis at 43.50-43.60 (seems to have been broken on Friday) and then much stronger down at 41.22-41.40 with the 50 and 200 week MA's as well as a previous high and low daily close at that same price. Should that important level of support be broken there is little support (other than psychological at $40) until the 38.15 level (39.15 on a daily closing basis) is seen. Major support, both from the daily and weekly charts, is down at the $37 level.
Based on the weekly charts, if the indexes show "some" weakness over the next few weeks (likely) it would suggest that IR will test the support in the low $41's. Should the indexes break their supports and head back down to the January lows, the stock could easily get back down to the $37 level. This move down would not mean the stock is in a downtrend but in a sideways trend with very little mid-term direction. Should the indexes make new lows on this phase, further breaks in the stock would be possible.
Sales of IR between 44.95-45.25 and placing a stop loss at 46.94 and having an objective of 37.00 would offer a risk/reward ratio of 4-1. At the very minimum a drop down to the 41.25 is likely and that would offer a 2-1 risk/reward ratio but with a very high probability number.
My rating on the trade is an 8 (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 Stock
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Open Positions and stop loss changes
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| NUAN is in a bind that seems to have the traders scratching their heads. For the last two weeks, the chart has seemed poised to breakout but the recent weakness in the indexes has prevented it from happening. I believe that much will depend on Monday and how far down the indexes go. The chart did trade above the weekly resistance level at 18.21 on Friday but by the end of the day the stock closed at 17.99 (below the 18.21 level and exactly at the 50-week MA). The breakout did not occur. The 50-day MA is currently at 17.50 and strong support is found at 17.36, on a daily closing basis. It seems likely NUAN will see one of those two levels on Monday, if the indexes keep on falling. If the indexes hold on to their respective supports NUAN will likely rally and if the indexes are able to stage a rally up to their resistance levels, it is also likely that NUAN will breakout and head up to the $20 level. Everything right now seems to be based on how low the indexes go this week. HRB this past week did re-test successfully the previous high daily close at 22.04 with a high close of 21.71. The stock is now set to break the previous support level at 20.76 and head down to the 19.50-19.60 level. Nonetheless, the 20.76 level is decent support from the previous low as well as the 20-day MA. A close below 20.76 on Monday will likely bring in strong selling. VLO, on a weekly closing basis, closed at the lowest level since Oct05 and only has one weekly closing support of consequence left at 47.33. The most recent intra-day low at 47.63 was broken on Friday but the stock was able to close above it, thus negating the intra-day break. Stop loss orders should be at 47.53 but since the stock closed so close to that price you may want to have them as "mental" just so that you don't get stopped out unnecessarily. The stock is in dire need of a close above 48.10 (both on a daily and weekly basis) to erase Friday's negative drop. This stock does not necessarily follow the DOW but it does follow the price of oil and higher oil prices affect the stock negatively. Most of the drop on Friday was due to new all-time highs in the price of oil. If the price of oil is again higher on Monday, this stock will need to be liquidated as it will not hold up, chart-wise, if it goes any lower. ELON had a breakout on the daily charts this past week that by the end of the week had been reversed. Friday's close gave a failure-to-follow-through signal that should generate further downside. On a weekly closing basis the stock did "not" break out as it had a lower close than last week when it closed at 15.10 (15.04-15.16 was a major previous support level now considered resistance). The lack of confirmation on a breakout on the weekly charts puts the stock back into a bearish stance. All in all, the action on Friday was negative and likely means the stock will test the previous breakout area at the $14 level. Support will be strong from 13.63-14.16, as the 13.63 level is where the 20-day and 100-week MA's are currently located and the 14.16 level was the highest daily close for a period of 8 weeks, before the stock broke above. I have seen that this stock is quite volatile and has trading ranges of consequence and therefore I believe a possible trading range for the week could be 13.63-15.83 with the lows probably being seen first. This, of course, will likely depend on the indexes holding above their support levels as well. It is tough to suggest a course of action for the week until it is seen what the indexes will do. Nonetheless, if the support levels hold, I would expect ELON to give an opportunity to re-evaluate the chart during the week or at least to get out at a better price than Friday's close. Evidently, if the stock opens up higher on Monday, liquidation of long positions should be considered. SVNT continues to show a very bullish formation on the weekly charts but a drop down to the 18.35 level intra-day seems probable and its likely the stock will tread water for the next week or two. Nonetheless, the 18.89 level, on a daily closing basis, continues to be strong support and will not likely be broken unless the indexes break their support levels. The 19.80-20.10 level is now considered strong resistance and therefore it is possible that a trading range this coming week between 18.35 and 20.10 could be seen. As I have stated before, this stock is very bullish but until the FDA gives its approval to start producing the gout medicine (an approval that is not in question but simply is a matter of time), the stock will continue to be affected somewhat by the indexes. I am looking to keep my positions at this time and will likely go without a stop loss for the week. Will let you know more after I see the index action on Monday. OVTI closed right on its major weekly closing support at 16.30 and was not as affected by the indexes dropping as some of the other stocks. This is a fundamentally bullish stock that has been testing its major support level on the charts between 15.73 and 16.30. The weekly chart continues to show a very bullish flag formation that is still very much in place. An intra-day drop as low at 15.73 is likely and it is possible that the support, on a daily closing basis, at 16.30 may be broken. Nonetheless, the weekly support at 16.30 is a lot more important that the daily closing support at 16.30. It is possible to break the daily but not likely will the weekly break. In addition, to the strong intra-day support at 15.73, the 50 and 100 day MA's are all around 15.70 in addition to the 20-week MA. This is a stock that would not likely be under pressure now if it wasn't for the indexes but even then, it seems unlikely the stock will break the support levels here unless the indexes have a collapse. DIOD closed lower this week than last week thus confirming the strong resistance on the weekly charts at the $25. It now seems highly likely that the stock will be heading down to test its support levels underneath. On a weekly closing basis, there are 3 support levels of consequence with the closest one being 23.18, then 22.39, and a double bottom and probable downside objective at 21.79/21.93. On the daily charts, the close on Thursday at 25.32 was a successful test of the 100-day MA and the close on Friday broke the most recent low close at 24.59. Such a test and break of support increases the probabilities of a drop down to the 20 and 50 day MA as well as previous support at 23.09-23.11. It is highly likely that a drop down to that level will be seen this coming week.
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1) DIOD - Shorted at 25.16. Stop loss at 25.60. Stock closed on Friday at 24.36.
2) TNE - Purchased at 26.72. Liquidated at 25.91. Loss on the trade of $81 per 100 shares plus commissions.
3) ELON - Purchased at 15.16 and then again at 14.98. No stop loss as this time. Stock closed on Friday at 14.44.
4) OVTI - Purchased at 16.24. Stop loss at 15.63. Stock closed on Friday at 16.30.
5) ITG - Liquidated at 49.06. Averaged short at 47.64. Loss on the trade of $288 per 100 shares (2 mentions) plus commissions.
6) HRB - Shorted at 21.98. Stop loss at 22.28. Stock closed on Friday at 20.88.
7) VLO - Purchased at 50.13 and again at 48.17. Now averaged long at 48.71. Mental stop loss at 47.53. Stock closed on Friday at 47.70.
8) SVNT - Purchased at 20.32 and again at 19.00. Averaged in at 19.66. Stop loss at 18.25. Stock closed on Friday at 19.04.
9) KGC - Liquidated at 23.92 Purchased at 20.83. Profit on the trade of $309 per 100 shares minus 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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