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Issue #74 
June 01, 2008 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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| DOW Facing Trend-Change Confirmation Week!
DOW Friday close at 12638
Two weeks ago the DOW made a statement when it failed to make new highs on both a daily and weekly basis and then dropped and closed below its major support level at 12743. Without a major news item of consequence, the changing of a short-term trend is a process that can take several weeks. The first part is to make a statement which includes a break of major support (something the DOW did two weeks ago). The second part is a move back toward the previous highs as a re-test of the resistance level (something the DOW seems to have done this week. The last part is confirmation the top has been found with a second failure. The DOW has just given the market the first two legs of the process and this coming week will either confirm the top is in place or negate the signal.
After falling all the way down to 12443, a drop of 694 points, the DOW was able to generate a weak rally back up to 12727 this past week (a 40% recovery). In the process the index failed to get up to the now again major resistance level at 12743 and on Friday, by closing in the red, confirmed that the daily closing resistance at 12650 is strong as well. In addition, the rally this past week was anticipated as it is the end of the month and companies do a lot of "window dressing" thus causing the DOW to close on a positive note.
Resistance in the DOW is very strong, on a daily and weekly closing basis at 12743. Resistance is now also strong at 12650 but only on a daily closing basis. The last time the DOW closed at 12650 and then closed in the red the following day, the index dropped down to 12270 (12302 on a daily closing basis) within a week. On a daily closing basis, there is some minor support at 12480, a bit stronger at 12302, then again at 12182-12216, and major at 11971.
In looking at the weekly chart, if the top of the sideways trading range has been seen, it is likely the DOW will be trading between 12743 and 11971 for the next 4-6 weeks. Whether it is heading down to that lower level or up to the 12743 first is not clear. Based on the failure of the index at 12650 on Friday, I believe the downside target will come first.
One interesting fact I researched this weekend:
Over the past couple of years, when the NASDAQ outperforms the DOW it is usually a bear signal. During the last 2 years, the last 4 tops seen in the indexes were all preceded soon before with a stronger-than-the-DOW NASDAQ. With the NASDAQ coming within 21 points of last week's intra-day high at 2551 and flirting at the end of Friday's session with the close made two weeks ago at 2529 and the DOW still trading 400 points below last week's high and closing 390 points lower than the close two weeks ago, it can be said the NASDAQ totally outperformed the DOW this week.
The action in the DOW this past week was weak and with the end-of-the-month window dressing done, it is likely the index will be heading lower from here. Nonetheless, if the NASDAQ is able to punch through its resistance level on Monday, the DOW could rally up to the 12743 level first. It is my belief, though, that the NASDAQ will fail and that the DOW will head lower next week. I also believe the DOW will be trading in a sideways range between 11971 and 12743 over the next few weeks. The scenario I envision is that the lows will be visited first and then a short covering rally will ensue that will take the DOW back up to its major resistance level at 12743 later on this month. It is likely the action on Monday will "tell the story".
NASDAQ Friday Close at 2522
The NASDAQ was definitely the strong sister this past week as the index was able to recover 83% of last week's drop and closed less than 1% from the close two weeks ago. Nonetheless, the close was once again right at the 200-day and 50-week MA's and if it fails to follow-through to the upside next week will be considered simply a successful re-test of the recent high as well as of the MA's.
Another negative note, is that it has been seen in the recent past that when the NASDAQ outperforms the DOW it usually means the indexes, in general, are ready to take a tumble.
This past week, using the high and the low of the week, the NASDAQ traded between the 50 and 100 week MA's as both levels were touched intra-week. No re-test of the March lows on the weekly chart has yet been made and the chart seems to be saying that if the index fails to rally higher this week, that re-test will not be long in coming. In addition, the strength seen on Friday fell short of accomplishing a new 5-month high, on both the daily and weekly charts, and in conjunction with the failure to close above the moving averages, seems to make the index lean toward going lower this week. Unless some positive fundamental news is released the daily and weekly closes should be lower this week than last week. .
Resistance, intra-day, is strong at 2551 and on a closing basis at 2529. Support is not found until the 2440 level, on a daily closing basis, is seen (2430 on an intra-day basis). After that there is no support of consequence until the 2362 level is seen where the 100-day MA, a minor previous low, as well as the possible runaway gap is found. There is also some support at 2400 from the 50-day MA as well as psychological.
The chart on the NASDAQ has three gaps that are presently open and are likely to be in the minds of the traders. The closest gap is above the index up at 2571-2592. This gap is likely to have been driving up the stock recently. With the high last week at 2551 and this week's high at 2530, it is evident the traders are trying to get that gap closed. If there is any follow through strength this week and the 2551 resistance level gets taken out, it is highly likely a rally up to 2592 will ensue to close the gap. By the same token there are two gaps below that have been acting as a breakaway and runaway gap. The first gap is at 2291-2313 and the second gap is at 2348 and 2362. Should the index break down this coming week, it is likely those two gaps will become magnets and the traders will shoot for closure of both of them.
It is more evident in the NASDAQ than in the DOW that this week will be important for the immediate short-term (1-2 weeks). A rally in the NASDAQ above 2551 will give this index further strength for a rally perhaps as high as the low 2600's. By the same token, should the index close in the red on Monday, especially below 2500, the drop down to 2440 should be swift.
I do believe that because the NASDAQ has the most important and closest levels on the chart, that all decisions on the indexes this week, should be made by looking at the NASDAQ chart.
S&Poors 500 Friday close at 1400
This past week the SPX was successful in testing the support down at 1374-1376 as well as the 50-day MA at the same price. The index then generated a rally back up the important psychological pivot point at 1400 as well as the 20-day MA, also at the same price. The rally, when compared to last weeks drop of 64 points was weak and did not accomplish enough for the bulls to feel comfortable. The index did trade this week between the 20 and 50 day MA's but was not able to accomplish close above or below either of them.
The SPX chart is looking bearish but seems to be presently in a trading range between the 50 and 100 week MA's at 1364 and 1417 respectively. Like with the DOW, it is not clear which of these two levels will be seen first. The failure on Friday to go above the previous day's high at 1406, I believe is indicative that the index will have a lot of trouble this week getting above 1407 and therefore, unless some positive fundamental news comes out, it is likely the index will be heading lower.
Resistance, on a daily closing basis, is decent up at 1406-1407 and then strong at 1417-1422. Support is strong at 1374-1376, decent at 1384, decent again at 1364, and major at 1325-1331.
The relative weakness of the rally this past week seems to state that now that the end-of-the-month window dressing is over, that the bears will once again be in control. I do believe the 1407 level as well as the 1384 level will be the "keys" this week. A break above or below each of those levels should generate a 15 to 20 point move in that direction.
The SPX has often been the chart leader among the three major indexes but at this particular time, the index is not giving any well-defined clues as to which direction will come first. It is evident, though, that the chart picture in the SPX seems to state that a drop down to the 1325-1330 is the most probable scenario for the next couple of weeks.
This past week the indexes generated a short-covering rally after the strong drop last week. It was somewhat expected as it is known that end-of-the-month window dressing was likely to happen, especially when the month was looking like it would end up lower than last month. With that behind, as well as the possibly successful re-test of the highs seen this week, the indexes are now likely to continue what was started two weeks ago when they gave sell signals that the recent short-term up-trend was over.
Unless strong fundamental news comes out, changes of trend tend to take several weeks to become effective as re-tests of the previous trend are not only likely but necessary. During this period of time, trading becomes difficult, as two-way action is the norm. It is important to note, though, that the NASDAQ has outperformed both the DOW and the SPX for the past couple of weeks, and in the recent past that has been a signal that the indexes are soon heading south.
The sell signal given two weeks ago is still in effect and it is up to the bulls to prove otherwise. Resumption of the short-term downtrend should come this week.
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Stock Analysis/Evaluation
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CHART Outlooks
With the likelihood of this past week having been a re-test-of-the-sell-signal week, short positions will have preference. Nonetheless, in certain individual cases, long positions can still be considered, as the market is not likely to get into a strongly defined downtrend.
HAL (Friday Close at 48.58)
HAL is a stock that just recently broke out of a 30-month sideways trend between $28 and $42 and generated a rally up to the $50 level. The breakout occurred the week of April 7th when the stock was able to generate a weekly close above the previous weekly closing high at 41.28. Two weeks ago the stock saw an intra-day high at 50.29 and a weekly close at 49.48.
A price such as $50 is normally considered a strong psychological resistance level and over the past week, in spite of the strength of the indexes, HAL has shown an inability to continue the up-trend. With this stock having been in such a long-term sideways trend, it seems possible and even probable that all that has happened is that the sideways trend has been raised and that the stock is now likely to get back into a sideways trend again but with higher prices.
After hitting the 50.29 high two weeks ago, HAL corrected back down to 46.82 and the 20-day MA. This past week the stock rallied back up to 49.29 but after getting to that level, the stock seems to have stalled and using the 10-minute chart, the stock seems to have built a small head & shoulder formation that looks ready to break. With the indexes likely to resume the downtrend this coming week, it is likely that HAL will be heading back down to test the breakout level at 41.28.
Resistance is evident at the all-time high at 50.29 and now some minor resistance will also be found at the 49.29 level. Support will be found from the 20-day MA at 47.93 as well as the recent low at 46.82. Below that there is no support of consequence until the 50-day MA at 44.98 is seen. That support level does show quite a bit of strength. Below the 45.00 level there is nothing until the previous high at 41.28 is seen.
It seems quite possible that HAL could get into a trading range between $40 and $50 for the next few months but at the present time, the probability of a drop back down to the $45 level is quite high. Should the stock close below 47.98 (previous high close before the 50.29 level was seen), it will become also highly likely that a trading range between 44.98 and 47.98 will be in effect for the next couple of weeks. After a couple of weeks of trading within that range, the break down to test the previous highs could then occur.
Sales of HAL above 48.70 and placing a stop loss at 50.39 and having an objective of 41.28 will offer a risk/reward ratio of 4-1.
My rating on the trade is a 6.5 (on a scale of 1-10 with the strongest probability rating being 10).
RHT (Friday close at 24.36)
After having been in a very well-defined and strong downtrend that started on May 28 2007 at 25.25 RHT found major support on March 17th of this year at 16.53 and generated a strong and almost straight up 10-week rally that is now reaching the original starting point of the downtrend. The downtrend started from a double top at 25.25 and that level must still be considered major resistance.
RHT broke above the well-defined downtrend line 5 weeks ago when it got above 20.76 (previous intra-week of some consequence) as well as above the 50 and 200 week MA's the same week. Over the past 4 weeks the stock has rallied straight up to Friday's high of 24.42. Evidently this was a stock with a high amount of short positions, due to the well-defined downtrend, and when the stock broke out, generated a lot of short-covering and opportunistic buying. The stock is now at levels where strong selling is likely to come back in and looks like an opportunistic short trade.
Using the daily closing chart, resistance is decent at 24.50 and major at 25.25. On a weekly closing basis and going back to Oct05, the $25 level has shown itself to be a major resistance and pivot point. During the entire lifetime of this stock there has only been one period between December 2005 and June 2006 when the stock was successful in trading above $25 (stock went as high as $32). During that period of time the $25 level was major support. Support on the daily chart is almost non-existent until the 20.99 level is seen and on the weekly chart the 21.60-21.80 seems to be strong support weekly closing support.
It is highly likely the stock will be having quite a few problems getting up to and above $25, especially in such an overbought condition as the stock finds itself to be presently. The 24.50 level proved to be a decent resistance when the stock was creating a double top at 25.25 and it is likely that it will again prove to be strong this time around. With several intra-day highs as well as somewhat important intra-day lows all converging between 20.79 and 21.22, it is likely the stock will be heading down to that level before attacking the $25 again, especially if the 24.50 resistance level holds up.
Sales of RHT at 24.40 or better and using a stop loss at 25.35 and having an objective of 21.00 will offer a 4-1 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).
LEN (Friday close at 16.88)
LEN has been in a major downtrend since Jul05 when the stock hit a high of 68.86 and with the sub-prime/real estate crisis that has been in effect since last year, LEN is one of the stocks that took it on the chin. Back in January of this year, the stock reached a low of 11.98. Since that low was made, the stock has been trading in a sideways range between a low of 13.80 and a high of 22.73 but now seems to be looking to go back down and at least test the recent lows if not make new ones.
Since April of this year, LEN has tested the 200-day MA successfully on two occasions and on the most recent test the stock then took a strong and immediate drop creating a mini inverted flag formation that seems to show a high probability of generating further downside. A week ago Thursday, the stock broke below the 100-day MA and this past week that break was tested successfully. The chart now shows that the probability of heading lower toward the previous support levels is high.
Resistance is decent at the recent high and 100-day MA at 17.89. Further resistance is found at the 20 and 50 day MA currently at 18.79, and major resistance is at the 200-day MA at $20. Support is evident but minor in nature between 16.50 and 16.72. Below that level there is no support until the 14.00 level is seen. Strong support will be found at the most recent low at 13.40 and major support at the 8-year low of 11.98.
Though the 11.98 low does not seem to be at risk, the probabilities of a drop down to either the 13.40 or 14.00 level is quite high, especially if the support at 16.50-16.72 is broken. With the stock having broken below the 100-day MA one week ago and re-testing that break successfully this past week, it seems highly likely the stock will be moving to the 14.00 level over the next week or two.
Sales of LEN between 17.20 and 17.40 and placing a stop loss at 17.99 and having a 14.00 objective will offer a 4-1 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).
FTEK (Friday closing price 25.44)
FTEK gave a strong buy signal on Friday when it was successful in breaking and closing above the 50-week MA for the first time since November as well as closing above the strong previous high weekly close at 24.51. In addition, in using the daily chart, the stock was also able to close above 25.13 on Friday thus breaking the last vestige of close-by resistance. FTEK started to generate a strong rally last week after Warren Buffett announced that cleaning the environment is the biggest opportunity in the market at this time and that the 21st century will belong to China. FTEK in a Chinese company that specializes in cleaning the environment.
China is now the largest emitter of carbon dioxide in the world. Air pollution is a significant worry for athletes preparing to compete outdoors in the Beijing Olympics and the Chinese government is no longer turning a blind eye to the problem. The 11th (and most recent) five-year plan made a national "green strategy" a core platform. That means penalties for businesses that abuse the environment, as well as a focus on conservation and emissions reduction, and an emphasis on sustainable development rather than on more rapid development at any cost.
From a purely chart point of view, FTEK made a statement this past week when the stock was able to close above all the previous and major resistance levels. It is now very likely that the stock will be moving swiftly upward to the $30 level where the next set of resistance levels are currently located.
Support is very strong down at the previous weekly closing high and 50-week MA at 24.50. Some support will also be found at the previous daily closing high of 25.13 as well as from the psychological support at $25. Decent resistance will be seen at the most recent daily closing high at 26.30 (27.16 intra-day). Further decent resistance, on a daily closing basis, will be found between 26.60 and 26.97and then nothing until strong resistance, on a daily closing basis is found at 29.60. On a weekly closing basis, the same 26.65 level is decent resistance and then strong at 28.61.
It is highly probable the stock is now heading higher and though the 26.65 level will likely halt this immediate rally and generate a move back down to the $25 level, a trading range for the next few weeks between $25 and $30 is now likely.
Purchases of FTEK between 25.00 and 25.15 and placing a stop loss at 24.00 and having an objective of 29.60 will offer a 4-1 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).
There are two other stocks I am looking at in RIO and VLO. Nonetheless, neither of these stocks are presentely close to levels I would be interested in purchasing. I may mention them during the week if they move down near my desired entry points.
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Updates
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| Monthly & Yearly Portfolio Results
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Open Positions and stop loss changes
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| Status of account for 2007: Profit of $9758 per 100 shares after losses and commissions were substacted.
Status of account for 2008, as of 4/30 Profit of $4355 using 100 shares per mention (after commissions) Closed out profitable trades for May per 100 shares per mention (after commission)
SVNT (long) $1076 RIO (long) $465 FTEK (long) $58 IR (long) $156 ININ (long) $128 HON (short) $51 STP (long) $24 Total Profit for May, per 100 shares and after commissions $1958 Closed out losing trades for May per 100 shares of each mention (including commission)
OVTI (long) $143
ELON (long) $198 VLO (long) $410 RMBS (long) $62 SNDA (short) $64 HRB (short) $44 AA (short) $120 DIOD (short) $209 XOM (short) $196 Total Loss for May, per 100 shares, including commissions $1402 Open positions in profit per 100 shares per mention as of 5/31
JNPR (short) $163
Open position in loss per 100 shares per mention as of 5/31EBAY (long) $50 ELON (long) $310 ANGO (short) $41 ORB (long) $67 Total $631
STP (long) $748
Status of trades for month of May per 100 shares on each mention after losses and commission subtractions. YGE (long) $610 Total $1358
Loss of $171
Status of account/portfolio for 2008, as of 5/31Profit of $4184 using 100 shares traded per mention.
NUAN rallied this week after touching the 200-day MA down at 18.70 but was only able to get up to the $20 level which is strong resistance. At 20.00 there was two previous daily closes at that level, one as resistance and one as support, but the 20-day MA was also there. With Friday's close in the red, it confirms that the test of that level was successful and it is now likely the stock will be heading back down this week. Strong support is at the 200-day MA at 18.60 as well as two previous low closes at that price. A close above 19.98 will be short-term positive and likely generate a rally up to 21.00 but a close in the red on Monday will continue to pressure the stock down toward the 18.60 level. Should the support at the 18.60 level break, a drop down to the 100-day MA as also strong support at 18.00 will likely be seen.
ELON, on a weekly closing basis, had a very strong week with a breakout above the 20-week MA at 13.00 as well as the 100-week MA at 13.90. In addition, the breakout was confirmed when the stock was able to close above the most recent weekly closing high at 13.32. Nonetheless, on both a daily and weekly closing basis, the 15.10 level of resistance looms imposing and if the stock indexes go down this week, as anticipated, it is likely ELON will correct back down to re-test all the MA's mentioned above. It is not likely, though, that ELON will see a weekly close below 13.90 any more and any intra-week drops near 13.00 should be bought aggressively. Any close above 15.10, especially if it is a weekly close, should be reason to chase the stock as rallies up to the $18 level will likely occur within a short time thereafter. STP opened the week with strength but by mid-week was breaking short-term support levels of consequence. Most likely due to worries about tax subsidies for solar companies in Germany being lowered as well as the pressure brought to bear by a strongly dropping FSLR, the stock went down to the 200-week MA at the $40 level. Germany announced on Friday that the subsidies would be kept (only lowered slightly) and the solar companies rallied on that news. STP ended the week closing below the lowest weekly close since March at 42.97 as well as below the 20-week MA and left a lot of questions that will need to be answered this coming week. The 20, 50, and 100-day MA's are converging and are due to cross sometime this coming week. It seems that not only that will happen around the $44 level but that is also where the 20-week MA is currently located. It is likely that $44 will be tested and be a major pivot point for the stock. With the stock having broken below all those MA's this past week, only a close above that level, both on a daily as well as a weekly basis, will get the stock going upward again. A daily close below 40.52 will be quite negative while a close above 44.30 would be considered positive. YGE suffered from the same news that affected STP and the solar companies. The stock did drop down to the $20 level on Thursday, which is considered important support, but was able to give the sign of a successful re-test of that level with a green close on Friday. The weekly close at 20.58 was still above the 20-week MA the stock has been trading above for the past 4 weeks and if the stock is able to close higher next week, that too would be considered a strong positive. An immediate rally up to the $24 level would likely occur. On a daily closing basis, there is decent resistance at 22.40 and much stronger at 24.62. The 50 and 100-day MA are crossing and are currently located at 21.35. If YGE is able to close above that level any day this week, it could be said the downside is over. A close below 19,87 would be very bearish. A close above 22.41 would be considered very positive. The stock has a lot to prove this week. ORB was able to close higher this past week than the week before and that makes the close two weeks ago at 25.54 a successful re-test of the breakout level at that same price. Nonetheless, on the daily chart, ORB still left some short-term questions open as the stock not only tested and failed to get above the 20-day MA at 26.30 but was barely able to close above an important resistance at 25.91. Like ELON, ORB is likely to show some intra-week weakness this week if the indexes are heading lower but should end up closing next week above this past Friday's close. Long term chart looks super bullish but the immediate short-term chart could show some weakness during the week. A close above 26.30 would be positive and potentially re-generate the weekly up-trend, while a close below 25.09 would likely generate a drop down to the 100-day MA at 24.60. JNPR attempted to break above the 20-day MA at 28.18 this past week but was unsuccessful. It seems likely that the stock will be heading down toward the 50 and 100 day MA's currently located right around 26.14. A break below 25.77 would likely generate a move down to the strong support at 24.70. Stops should be lowered to 28.40 and a break above that level would likely generate an attempt at the $30 level. A break below the recent low at 27.28 will likely take the stock down an additional $1. ANGO closed above the 20-week MA this week for the first time since November of last year. If the stock continues to show strength rallies up to the low $16 could occur. Nonetheless, in using the daily closing chart, the stock seems to be having a lot of problems generating further upside and a break and close below 15.03 would be quite bearish. For the past week, the stock has been straddling the 100-day MA and any daily close above 15.74 will likely stimulate a run up to the 16.24 level. It seems evident this coming week will be pivotal, one way or the other. EBAY had an uneventful week but was able to close right at the $30 level which is considered a good weekly support. The stock shows a very bullish flag formation on the weekly chart but the daily chart continues to show a short-term downtrend in effect. On Wednesday, the stock spiked down to 29.10 but was able to rally without generating a sell signal. Stops should now be raised to 29.00, as a break of that intra-day low, will likely generate further downside. Resistance is decent at 30.97 while 29.70-29.80 should show some support. With the close right at 30.00 on Friday, no positive or negative spin can be put on it as that price must be considered a strong pivot point.
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1) EBAY - Purchased at 29.50. Stop loss raised to 29.00. Stock closed on Friday at 30.00.
2) ANGO - Shorted at 15.90. Stop loss at 16.40. Stock closed on friday at 15.49.
3) JNPR - Shorted at 29.15. Stop loss lowered to 28.40. Stock closed on Friday at 27.52.
4) ELON - Purchased at 11.66. No stop loss at present. Stock closed on Friday at 14.76.
5) ORB - Purchased at 25.39. Stop loss at 24.25. Stock closed on Friday at 25.96.
6) STP - Purchased at 42.40 and again at 47.80. Averaged in at 45.03 (3 mentions). No stop loss at present. Stock closed on Friday at 42.54.
7) DIOD - Covered shorts at 27.95. Averaged short at 27.36Shorted at 26.80. Loss on the trade of $205 per 100 shares (3 mentions).
8) YGE - Purchased at 24.07 and again at 23.31. Averaged in at 23.69. Stop loss changed to 19.79. Stock closed on Friday at 20.54.
Previous Newsletters
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Encyclopedia of Chart Patterns. A must have for chart aficionados! |
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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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