Issue #75 ![]() June 08, 2008 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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With a Bang, Indexes Confirm Tops are Set!
DOW Friday close at 12210
The final confirmation of a temporary top in the DOW having been found was given this past week when the index failed to follow through on last week's late rally and then fell 420 points, below last week's low, and below an important support at 12270. In addition, last week's rally can be considered a successful re-test of the highs and therefore the topping pattern was also confirmed. It is clear the upside trend in effect since March, has been truncated. The stage is now set for further declines down to the 12000 level. The DOW is now trading below the MA's (20, 50, 100, and 200 day and 20, 50, 100 week MA). The only MA that has not yet been broken is the 200-week.
The question will now be asked whether the DOW is in the sideways trend between 12000 and 13100 or whether the weekly downtrend that was in effect from Oct07 to Mar08 is resuming. It is possible that question will be addressed and perhaps answered in the coming week. For now, it must be assumed that the trend is sideways and that the bottom of that sideways trend will be seen shortly.
Based on the initial drop from 13137 down to 12443 (694 points), this most recent drop in the DOW now has an objective of 12033 or lower (12727 rally high last week minus 694 points). With the close on the lows of the day and the week on Friday, strong follow to the downside should be seen at some point this coming week.
On a daily closing basis, there is decent support between 12182 and 12216. Support below that level is quite strong at 11951-11971. Resistance, on a daily closing basis, will now be decent at 12390. Any close above 12400 will be considered short-term positive, as there is no resistance above 12390 until 12550 is seen. If the near-by support at 12182 holds up on Monday, a rally up to the 12390 level is probable.
Nonetheless, with the weak close on Friday it is likely the buyers will not be buying aggressively and therefore further downside will likely be seen for the first part of the week. Drops down below the 12000 level are now probable and though there is little intra-day support until 11732-11757, the probabilities for a daily close below 11950 are small at this time.
The 12182 level, on a daily closing basis, must be considered an important pivot point. A close below 12182 on Monday will likely bring substantial pressure to bear and a drop below 12000. A close on Monday above 12182 could generate a move to the 12390 level first. Possible intra-week trading range could be 12390-11857.
Much of the selling on Friday was probably due to panic liquidation and perhaps an overreaction to the news of oil making new highs in conjunction with the higher unemployment figures not seen for years. Nonetheless, with the strong drop of Friday, if a rally occurs, it will likely be aggressively sold. It is probable that a drop down to 12000 will be seen at some point this week.
For now, one must assume the DOW is in a sideways market and that the bottom of the channel is in view.
NASDAQ Friday Close at 2475
The NASDAQ was definitely the index everyone was watching this past week and it did live up to its billing. The index on Thursday flirted with the previous intra-day high at 2551 and did make a new 5-month daily high close at 2550. Nonetheless, when the index on Friday fell below the previous high daily close at 2334 and traded below the previous weekly high close at 2529, selling appeared in strong quantities. By the end of the day the index had broken and closed below the strong support level at 2480 as well as below both the 25 and 200 day MA's and gave a strong sell signal based on the failure-to-follow-through action seen.
Certainly the out-performance of the NASDAQ over the DOW in the past 2 weeks had to be considered a negative sign, as over the past few years only when the indexes have been ready to drop has that happened. Now the NASDAQ has also given a strong sell signal and shows an intra-day double top (same as the DOW) it is likely to start leading the way down.
On a daily closing basis, support below 2480 is non-existent until the 2445 level is reached (2430 intra-day). Below 2445, only the 50-day MA at 2425 is seen as support, but with the index having given a sell signal, it is not likely the 50-day MA will offer much support. Below that level there is no support of consequence until the 100-day MA at 2365 is reached. That level is strong as it is also the area where there are several previous highs of consequence.
Keep in mind that the NASDAQ chart has 2 open gaps below and with the strong sell signal given, if the index starts breaking down below 2400, those 2 gaps will become magnets for the bears. The first gap down is at 2348-2362 (runaway gap) and the second is at 2291-2313 (breakaway gap). It is highly likely that if the first gap is closed that the second one will be closed as well.
Based on Friday's action, it is my belief the NASDAQ will be heading down this coming week and if the support at 2445 does not hold up, that the 2365 level of support will be seen.
One important point to consider, if the NASDAQ continues to outperform the DOW on the upside (not the downside) that likely means the situation is worse than I have mentioned above. When the NASDAQ starts to outperform the DOW on the downside, it is likely that a short-term bottom is close by.
Possible trading range for Monday is 2425-2480. Possible trading range for the week could be 2387-2480.
S&Poors 500 Friday close at 1360
The SPX has often been the chart leader in the past and based on what it did the last 3 weeks, it seems that once again this index will be the one to watch for clues as to what the indexes will do this coming week. For the last 3 weeks the SPX has traded between the 20 and 50 week MA's, on an intra-week basis, and on a weekly closing basis, it has traded between the 100-week and the 20 week MA's. On Friday, the index closed down at the 20-week MA and if it trades lower on Monday, it is likely to be heading down to the 200-week MA at 1325.
As it is, the SPX broke below the strong daily and weekly closing support at 1374-1376 and only the 20 week and 100-day MA's are left before the next level of chart support is found down around 1325.
Resistance will now be decent at the previous lows of consequence at 1374-1376 and much stronger at 1387 where there are two major previous intra-day highs as well as the 50-day MA. On a daily closing basis, the resistance is very strong now at 1380. Presently, other than the MA's at 1360, there is no support of consequence until the 1324 level is seen. Support at 1324 intra-day is decent but on a daily closing basis it is strong at 1326-1328. Some decent support intra-day is also found at 1313 and on a closing basis support is major at 1311. Intra-day support is also found at 1270.
It is likely that Monday will be very indicative of what to expect from the SPX for the week. A break below 1360 intra-day could generate aggressive selling. If the index opens higher on Monday, rallies up to the 1387 level (1380 on a daily closing basis) are likely. Nonetheless, such a rally would not necessarily get rid of the bearishness of the break on Friday.
I do believe the 1360 level will be an important pivot point for the index and if the index starts lower on Monday, that level will likely become resistance and a further strong drop down to 1324 could be seen within one or two days.
Based on the severity of the break on Friday, I do believe the index will be heading down this week to the 200-week MA currently at 1315. Probable trading range for the week is 1360-1313.
The break this past week was a confirmation that the indexes have likely found a mid-term top for at least the next 2-3 months. The question will now be asked, whether the indexes are in a sideways trend or has the downtrend resumed. It is highly likely that within a few days or a few weeks at most, the support levels of the sideways trend will be tested. Until that happens, the answer to the question will not be clear.
It is also likely that volatility will come back into the indexes and that some rallies will occur, but for the next couple of weeks, and until the marketplace figures out what it all means, it is likely that rallies will be aggressively sold.
It is evident that the strong drop in the indexes on Friday, as well as the close on the lows of the day and the week, should bring additional strong selling on Monday. If that does not occur and the indexes are able to stage a rally (even if it is small), then it increases the likelihood the indexes are in a sideways trading pattern and not resuming the downtrend. The lows of the sideways channel will still likely be reached within the next week or two but those lows should generate strong buying.
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Stock Analysis/Evaluation
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CHART Outlooks
If the anticipated drop down to the 12000 level in the DOW occurs, this will be a week to consider long positions. With the probability that the stock indexes are generally in a sideways trading range playing both sides of the coin will be the preferred approach for the next few weeks. Nonetheless, most of the mentions this week will be away from the close on Friday and patience will need to be used.
RIO (Friday Close at 37.44)
RIO is a Brazilian stock that mines iron ore and with the inflationary pressures that keep on building and the prices of commodities on a strong up-trend, companies that mine metals are attractive mid to long term investments. In addition, Brazil was recently upgraded by S&Poors as one of the nations with a great future and when that information is included, RIO becomes a very attractive stock to own.
RIO is a stock that broke out of a 6-month sideways trend between $38 and $30 back in April and generated a rally up to the $44 level in just 4 weeks. The rally reached its upside objective and the stock is now in a corrective phase re-testing the breakout level and should be considered as a good buying opportunity.
RIO seems to be in a short-term 3-wave correction phase and it looks like the stock in presently in the third wave. The previous all-time weekly closing high at 36.50 seems to be the objective.
On a daily closing basis, support is minor at 37.05 and stronger at 36.84. Strong support is also found at the 100-day MA as well as previous important support just prior to the breakout at 35.40. In addition, the 20-week MA is currently at that same price. On a weekly closing basis, the support should be strong up at 36.50, as that was the level from which the stock broke out from originally. Resistance is non-existent on the weekly chart until the previous high close at 43.91 is seen. On the daily chart, though, decent resistance at 38.71 from a previous close as well as from the 50-day MA and stronger at 40.66 from two previous daily closes at that price as well as the 20-day MA.
It is evident that RIO is in a corrective phase right now and that the previous weekly close breakout at 36.50 will be tested. In addition, with the stock on the defensive and the indexes under pressure, it is likely the traders will try to push the stock down, intra-week, to the lowest levels they can accomplish. There is one very clear objective the traders have with an open gap between 36.33 and 36.62. That is now a gap that is likely to be closed as the upside momentum in this stock has been temporarily truncated.
I do believe the traders will try to take the stock as low as the 100-day MA at 35.40 while closing the open gap and getting rid of all the stops that are likely placed below 36.62. After having accomplished those goals it is probable the stock will either get back into an up-trend, as inflation will continue to give fuel to higher iron ore prices, or at the very minimum get the stock back into a new sideways trading range with a re-test of the recent highs at $44. The previous sideways trading range was $30 to $38, this one could be $35-$36 to $43-$44.
Purchases of RIO between 35.50 and 36.30 and placing a stop loss at 34.83 and having an objective of $42.85-44.15 will offer a risk/reward ratio of at least 8-1.
My rating on the trade is an 8 (on a scale of 1-10 with the strongest probability rating being 10).
ITG (Friday close at 37.35)
ITG is a very volatile wide-ranging stock that was looking like it was going to the moon back on May 1st and here 4 weeks later looks like it wants to go fishing for the Titanic. The company operates as an agency brokerage and technology firm and on Thursday the company reported that the number of shares traded fell by 5% and that the volume of trading fell by 1.2%. This negative report, in conjunction with stop loss orders being hit below the major support level at $40, caused the stock to fall steeply on Friday.
ITG is evidently suffering from an industry wide problem of lower institution buying in the stock market and because of the innate volatility of this particular company, the stock got severely hit, up and above what other companies like NDAQ and NYX showed.
In looking at the weekly chart, though, the stock has reached a major level of weekly support with the drop on Friday down to 36.56 and seems to be at a level that is of interest for purchasing.
On a daily and weekly closing basis, ITG shows major support between 36.58 and 37.09 and some decent support below that at 34.97. On an intra-day basis, the support is quite strong between 36.36 and 36.57. Resistance is non-existent until the 40.22-40.58 is seen and even then, resistance must be considered minor at that price. Stronger resistance is seen at 42.50 and even stronger up at 44.15.
Over the past 2 years, on a daily and weekly closing basis, the stock has traded consistently between $36 and $50. With no specific negative news about the company, other than the industry wide problems associated with lower volume of stock trading, it seems probable that ITG's drop last Friday was severely overdone. In addition, the 200-week MA is currently at 36.36 giving that entire area one additional major support base.
It will be important to see how the stock opens up on Monday as an open below Friday's low of 36.56 could generate further strong selling, at least in the first hour of trading. If that happens, you should wait until the stock finds support before purchasing.
Purchases of ITG between 36.36 and 36.57 and using a stop loss at 35.26 and having an objective of 42.50 will offer a risk/reward ratio of 5-1.
My rating on the trade is a 6.5 (on a scale of 1-10 with the strongest probability rating being 10).
HON (Friday close at 54.01)
HON is a stock that just 3 weeks ago made new all-time highs but failed to follow-through on the breakout and started to get some aggressive selling when the indexes received a sell signal. The stock has dropped almost $9 from the highs and is reaching levels of support that should support the stock well.
HON is a strong worldwide company that has been trading since July of last year in a sideways fashion between $52 and $62 and now finds itself, due to the recent breakdown in the indexes, near the low of that trading range.
On a daily closing basis, support is major between 53.15-54.06 as there have been 4 major closing lows over the past 10 months. Intra-day support can also be considered major at 52.05 as that was the lowest low seen over the past 11 months. In addition, the 100-week MA is currently right around 51.80, which makes the $52 level a very strong support. There is no resistance of consequence until the 56.80 level is seen and even then, that resistance must be considered minor. Stronger resistance will be seen up at the 58.80 level.
With the stock closing on the low of the day on Friday and having dropped over $5 last week alone, it is likely there will be follow-through selling on Monday, quite possibly taking the stock down near the $52 level of support.
Purchases of HON between 52.00 and 53.00 and placing a stop loss at 51.60 and having an objective of minimum rally up to 58.00 will offer at least 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 24.78)
FTEK gave a strong buy signal a week ago 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, this last Friday, the stock successfully tested 24.51 level and confirmed the breakout with a second weekly close above that price.
b>FTEK has been showing strong buying in spite of the indexes being under strong pressure. With China being the largest emitter of carbon dioxide in the world and air pollution being a significant worry for athletes preparing to compete outdoors in the Beijing Olympics 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. This likely means that b>FTEK will continue to show strength and further upside appreciation.
Support is very strong down at the previous weekly closing high and 50-week MA at 24.50. Some decent support is also found down between 23.79 and 24.09 from the 20-day MA as well as several previous daily closing highs at those prices. 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.
With Friday's close above 24.51 FTEK has confirmed the breakout is alive and well. If the stock is able to hold itself above the 24.00 level this week, while the indexes are dropping down to their respective support levels, it is likely that the stock will stage a rally that could take it up to is primary objective up at $30. This could happen within a week or two.
Purchases of FTEK between 24.50 and 25.00 and placing a stop loss at 23.66 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).
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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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NUAN broke and closed below the 50, 100, and 200 day MA's this past week. In addition, it broke the 50-week MA but was able to close on Friday right at the 20-week MA, as well as at a major support level on the weekly charts at $18. Like with the indexes, any follow through on Monday to the downside (a break below Friday's 17.65 intra-day low) will likely generate additional strong selling and a drop down to the 100-week MA at 15.30. There is a very large area of congestion between 16.40 and 18.80 that should act as a brake on the way down but should the 16.40 level break, intra-day drops as low as 14.81 could occur. Resistance is now going to be very strong at 18.67-18.78. It does not look likely at this time that the stock will be able to get above that level for the short-term. ELON re-tested the major resistance up at the 15.00 level and was unable to close above it, though it traded above it during the week. It is now highly likely that a drop back down to support will occur. There are two support levels to look at. The first one that includes the 100-week MA as well as 4 previous daily high closes of consequence is at 13.86-14.16. Previous high closes never are as strong a support and low closes but the strength this stock has shown recently, it seems highly possible that level will hold up. This, of course, will depend on whether the indexes are in a sideways trend or resuming the downtrend. The next support level is at 13.10 where the 20, 50, and 100 day MA's are currently crossing. In addition, there is also strong previous support at 12.96 and very strong at 12.50. I do not see the stock getting below the 12.50 level anymore, so that is probably the worst case scenario. If the 13.86-14.16 level holds up, it is a buying area. Any daily close now above 15.20 will likely generate strong buying. STP closed on Friday at the 200-week MA and above the $40 area that has been such a pivotal point. With the strong fundamentals this company has, it is unlikely this level, on a weekly closing basis, will be broken, especially after a day when the stock showed some strength in the face of a breaking stock market. Wednesday's 38.96 daily close should be considered important support and the stock should not close below that level anymore, though intra-day drops down to 37.52 could still occur. A daily close above 42.54 should now be considered a buy signal. Nonetheless, the area between 41.60 and 42.54, on a daily closing basis, is now strong resistance. Intra-day rallies up to 43.68 will likely occur this week if the stock does not break the support at 38.96. If the stock is able to close next Friday above 40.24, you could end up seeing the same kind of strong rally, off of the 200-week MA, that occurred recently with ELON. YGE rallied on Friday up to the 100-day MA at 20.62 and was unable to break above. The stock did close above its lowest recent daily close at 18.97 with a close at 19.03. Nonetheless, the action on Friday was not positive and drops down to the 18.32 level of support continue to be possible. A close above 20.79 continues to be necessary to generate further upside. Right now the stock is keying off of what FSLR and STP do. Nonetheless, it is likely the stock will begin trading more with STP than with FSLR so watch that stock for direction. A close above 20.79 will now be a buy signal. A close below 18.32 should generate liquidation. ORB with the close on Friday below the previous weekly closing high at 25.54 seems to be stating that the recent weekly up-trend is on hold. The stock did touch the 200-day MA down at 24.15 and that is a level that should offer decent support. It is unlikely that the stock has gone into a downtrend as no negative fundamental news has come out. Nonetheless, the spike-down type action on Friday was disturbing and if the indexes continue to fall on Monday, ORB could do the same and drop down to the 50-week MA and previous intra-day and daily closing support at 23.60. It seems highly unlikely that any further weakness would occur below that price. Though a lot depends on whether the 23.60 level holds up and whether the indexes break down or are going sideways, the chart seems to be saying that a trading range between 23.60 and 26.50 or perhaps 24.00 and 27.00 is the most probable. I will probably average down should the stock get to that price. ANGO finally got the spike down action that is needed when a temporary top is being formed. Should the stock break down and close below 15.03 a strong sell signal would be given. Though the daily close on Thursday at 16.45 was above the 16.24 daily close resistance I had mentioned previously, on Friday that close was negated with a close at 15.63. Nonetheless, the weekly closes continue to be higher, so no signal on the weekly chart has been given that a top is in place. More action is needed before any determination can be made but the $1+ drop on Friday on increased volume seems to be stating the probabilities have increased that the stock is ready to start going down. HAL had a strong turnaround to the upside that started on Wednesday and by Friday the stock had made a new intra-day all time highs. Nonetheless, the stock had a reversal type day on Friday in which new all-time highs were made but the stock closed below the previous daily and weekly high closes and on the lows of the day. The stock missed having a classic reversal day by closing in the green. Such action could be a major negative sign should there be follow through to the downside on Monday, as well as a lower daily close. Intra-day resistance will once again be strong at 50.29. Intra-day support is strong down at 46.82-47.19 and on a daily closing basis between 47.77-47.98. With Friday's reversal type action, I would anticipate some downside follow through but the trading range for Monday could be 50.29-48.40. The close on Monday will be important to determine further action of the stock after the new all-time high was made. FTEK had a very bullish day within the outline of a strong down stock market. The weekly close at 24.78 on Friday confirms the breakout above 24.51 the stock had two weeks ago. In addition, the stock was able to close around the $25 level, which must now be considered a major pivot point. A close in the green on Friday would likely generate aggressive buying next week. The 24.00 level continues to be strong support, if broken, the stock may be in trouble. Nonetheless, unless the stock market takes a major tumble on Monday, it is not likely that FTEK will break 24.00, and even then, it may not happen. RHT has a very bearish inverted flag formation as well as classic reversal type week with higher highs, lower lows, and a close below last week's low. Such a formation has a short-term objective of 21.00-21.40 and that level should be seen sometime this week. Should the stock get down to those levels, profits should be taken. Longer-term prospects are not clear yet. A daily close above 23.15 could be a signal to take profits as well.
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1) EBAY - Liquidated long at 30.00. Purchased at 29.50. Profit on the trade of $50 per 100 shares minus commissions.
2) ANGO - Shorted at 15.90. No stop loss at present. Stock closed on friday at 15.66.
3) JNPR - covered short at 26.43. Shorted at 29.15. Profit on the trade of $272 per 100 shares minus commission.
4) ELON - Purchased at 11.66. No stop loss at present. Stock closed on Friday at 14.55.
5) ORB - Purchased at 25.39. No stop loss at present. Stock closed on Friday at 24.15.
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 40.24.
7) RIO - Purchased at 38.28. Liquidated at 37.75. Loss on the trade of $53 per 100 shares plus commission.
8) YGE - Purchased at 24.07 and again at 23.31. Averaged in at 23.69. No stop loss at present. Stock closed on Friday at 19.03.
9) RHT - Shorted at 24.78. Stop loss lowered to 23.25. Stock closed on Friday at 22.76.
10) HAL - Shorted at 48.76 and again at 48.08. Averaged short at 48.42. Stop loss at 50.30 stop close only. Stock closed on Friday at 49.39.
11) FTEK - Purchased at 25.01 and again at 24.66. Averaged long at 24.835. Stop loss at 23.63. Stock closed on Friday at 24.78.
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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