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Issue #78 
June 29, 2008 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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| DOW Sinks - Seeks Support!
DOW Friday close at 11346
The Fed left everything unchanged at this month's FOMC meeting and it is now become evident that there are no short-term solutions available to what is ailing the marketplace. In fact, with the price of oil and commodities going through the roof and no end in sight, inflation is likely to continue going higher. The Fed will be forced to raise interest rates at some point to deal with the problem, therefore causing businesses to lose the ability to borrow money cheaply and/or easily. With profitability coming down everywhere, this problem will now feed on itself and cause lower prices across the board. It is now clearly evident that the indexes are back in a downtrend and that all rallies will be met with selling.
The DOW broke below the previous intra-day low at 11635 and got down as low as 11298. In addition, considering that the all-time high daily close last year was 14165 and that the close this past Friday was 11347, the DOW closed just a fraction above the 20% drop that is "officially" considered a bear market (closed at 19.89%). On an intra-day basis, though, that bear market can now be said to be in effect as the index has dropped 20.5% from the intra-day high made at 14198 to the intra-day low of 11298.
Nonetheless, the DOW was able to generate a mini rally late in the day and since the index is in such an oversold condition, it is possible that a small rally will occur before further downside is seen.
Resistance is now going to be very strong at 11670 (11643 on a daily closing basis). That was a high daily close seen on May 10th 2006 before a drop down to 10706 was seen (10699 intra-day). Other than that area, there is no resistance of consequence near-by. Support is minor at 11300, a little stronger as well as psychological down at 10970-11040, and very strong down at 10700.
With the oversold condition, it is possible the DOW will attempt some short-lived short-covering rally on Monday or Tuesday. A test of the resistance is possible, as sellers probably want to see where the resistance actually is before continuing to sell aggressively. Nonetheless, the index has broken down and the buyers are not only on the defensive but mainly running for the hills and therefore rallies will probably be the exception and not the rule. Selling rallies is what most traders are stating they will be doing.
If there is going to be a rally this week, it will probably occur either Monday or Tuesday as the index did show a bit of resiliency on Friday. Nonetheless, based on the weekly bar chart, the probabilities of the DOW reaching down to the 11000-11040 level this week is strong. Based on last week's range, possible trading range for the week could be 11670-11040.
NASDAQ Friday Close at 2316
The NASDAQ broke down below the important support at 2373 this week and closed both the runaway and breakaway gaps at 2348 and at 2291 respectively. Nonetheless, once the index reached the 200-week MA at 2293 and after closing the breakaway gap at 2291, the index managed to rally 30 points from the low. If there is a early week rally in the indexes it will probably be generated by the NASDAQ as it is the only index that has been able to maintain itself above several important support levels and is still the index that will bring in some buying. Nonetheless, the fact the NASDAQ continues to outperform the DOW and the SPX likely means the indexes are still heading much lower.
The NASDAQ did leave a gap between 2376 and 2366 this past week and if there is a rally in the early part of the week, the index will likely try to close that gap. Nonetheless, this week's gap could be considered the runaway gap in the chart as back in January 4th the index left a gap open between 2592 and 2571 and that gap might be considered the breakaway gap. When the fundamental picture is considered, such a formation fits in well with the news and would be a powerful chart formation that would not likely be reversed for months and/or years.
Resistance is strong between 2352 and 2364, as there are 6 prior intra-day highs and lows at that level. In addition, and probably more importantly, the 20-week and 100-day MA's are both at that level as well making that whole area very strong resistance. Even if the gap is closed, there is major resistance at 2376 as that was a major high back in 2006 from which the index took a drop down to the 2000 level over the next few weeks thereafter. Support must be considered strong at 2290-2293, as that is where the 200-week MA is located as well as a previous daily and weekly close of some consequence. Using the daily closing chart, support is decent between 2261-2279, as there were 4 previous daily closes (2 highs and 2 lows) in that area over the past few months. Below that there is no daily support until the 2166-2177 levels are reached (2205-2212 on a weekly closing basis).
With the NASDAQ still being the index were the buyers are still showing some interest, this chart continues to be the one to follow. Nonetheless, should the index start breaking below the 2290 level things could get dicey. Back in 2001 the index broke below the 200-week MA but reversed itself almost immediately and rallied substantially above the line for the next 2 months, only to break that line a second time and generate a move down of 900 points within the next two months thereafter. The same picture seems to be repeating as the NASDAQ broke below the 200-week MA back in March but immediately reversed itself and generated a substantial move up thereafter. If the 200-week MA is broken again, it is possible that a like move could be seen this time as well.
I do believe the NASDAQ is the chart to watch closely this week with 2364/2376 on the upside and 2290 on the downside being "clearly defined" levels that will show what this index is likely to do. A rally upward toward resistance is likely to be the course of action at the beginning of the week. With no fundamental news of consequence due out this week, the traders will probably try to take advantage of the weak shorts that entered the market this past week. Nonetheless, if the resistance levels hold up, the sellers will likely get aggressive again and take the index back down and break the 200-week MA at the end of the week. Based on last week's range, possible trading range this week could be 2364-2230.
S&Poors 500 Friday close at 1278
The SPX, like the DOW, broke below the 200-week MA and made a new 21-month weekly closing low. The index was able to maintain itself above the previous intra-week low at 1270 and 1257 as well as above the previous daily closing lows at 1273 and 1277 but on the weekly chart the index now looks to be on a break of support. Confirmation next week with another close below 1288 is needed in order to generate further downside.
Resistance will now be very strong between 1311 and 1318. The 200-week MA is currently at 1318 and the 1311 level is the last important daily low close support, which was broken this week. Minor resistance should be found at 1288/1289, as that was Friday's high as well as the weekly close that was broken. Support will be strong between 1257-1270 on an intra-day basis but at 1273 on a daily closing basis. Below that there is no support 1219-1225 intra-day is seen (1237 on a daily closing basis).
Based on the close on Friday right at the middle of the trading range as well as the late rally, it is likely that on Monday and Tuesday the index will attempt a short-covering rally and perhaps a re-test of the 200-week MA that was broken. Nonetheless, the level from which the SPX broke down on Friday was 1304 and if the index is unable to get any higher than that, the selling will reappear in droves.
Possible trading range for the SPX this coming week 1304-1236.
It is now clearly evident, both fundamentally and on the charts that the downtrend has resumed. In looking at the probability of a three-wave scenario (this being the second wave) the probability of continuation of this week's drop is high and immediate. The objectives of the 2nd wave are still about 5% lower than where the indexes closed on Friday.
Due to the small bounce on Friday it is possible that a small rally at the beginning of the week will occur. Nonetheless, it is also possible that the indexes will drop that additional 5% at the beginning of the week and then stage an attempt to rally toward the latter part of the week. Either way, it seems that the indexes will see lower prices this week. Holding or not above last week's lows on Monday will determine which of the two scenarios will occur.
Since the indexes are now back in a downtrend, rallies will be sold aggressively until such a time that the fundamentals start getting better. At this time there does not seem to be any catalyst that will generate a rally of consequence.
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Stock Analysis/Evaluation
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CHART Outlooks
With the indexes now in an evident downtrend where all rallies will be aggressively sold, only short positions should be considered. Nonetheless, due to the oversold condition of the market, entry points need to be carefully chosen.
EBAY (Friday Close at 27.61)
Two weeks ago EBAY broke below the 20-week and 100-day MA's at 29.30 and started the most recent downtrend. The stock fell down to 27.64 (27.72 on a daily closing basis) and from that level generated a rally up to 29.31 to re-test the MA's it had broken below previously. The re-test was successful and the stock fell again and broke the support at 27.72, on a daily closing basis, on Friday. It is evident the stock is back into a short-term downtrend and there is no support until the 26.00 level is seen, and even then that support must be considered minor.
EBAY is in a choppy short-term downtrend with many small peaks and valleys but in looking at the weekly trend the stock has been going straight down and shows no inclination to turn around yet.
Resistance is now decent at 28.60 (most recent high, made on Thursday) where the 20-day MA is currently located. In addition, there is a decent amount of congestion between 28.13 and 28.48 that will also serve as resistance as well. Support is very minor at 26.63 and then stronger at 25.33-25.64 (25.78 on a weekly closing basis). Below that level there is major support at 24.20, on a weekly closing basis). Below that there is a vacuum until the mid to low 10's are reached.
Sales of EBAY between 28.10 and 28.48 and placing a stop loss at 28.70 and having an objective of 25.50 will offer a 4-1 risk/reward ratio.
My rating on the trade is a 7 (on a scale of 1-10 with the strongest probability rating being 10).
AMZN (Friday close at 74.66)
AMZN has a chart much like the DOW where it seems the stock is beginning the second leg of a three-wave downtrend. In March the stock got into a short-term up-trend that started at 60.60 and ended 4 weeks ago with a high of 84.88. The stock has a double top at that price followed by a re-test of that double top with a rally up to 84.47. This was then followed by a break of important support this past week with a move below 75.00 as well as below the 100-day and 20-week MA's at that same price.
If AMZN is in the second wave of a three-wave move, the objective of this leg would be $50. Nonetheless, at this time that may be expecting too much. Nonetheless, with the recent break below 75.00 (76.15 on a daily closing basis) it seems likely the stock is heading lower to test other important supports below $70. Such a drop makes this trade an attractive risk/reward ratio play.
On a daily closing basis, resistance is very decent at 75.95 and very strong between 77.30 and 77.70. On a daily closing basis, support is decent at 72.41, at 68.49 and very strong at 62.74.
The way the chart looks at this time, it seems likely that the stock is heading down somewhere between $67 and $69. Nonetheless, there is a good possibility the stock is in the 2nd wave of a three-wave downtrend that could cause a break of the most recent low at 60.60 and a drop down to the 200-week MA around 50.50.
If the indexes do generate a rally in the early part of the week, the stock should get up near the $77 level at which time a short position would have a good risk/reward ratio.
Sales of AMZN between 76.23 and 76.93 and placing a stop loss at 77.80, on a stop close only basis, and looking for a drop down to 67.22 will offer a 6-1 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).
NTES (Friday close at 20.69)
NTES is a stock that recently failed to follow-through on a new all-time high. Previous all-time high had been 25.49 (24.54 on a weekly closing basis) and 6 weeks ago the stock got up to 25.70 (24.96 on a weekly closing basis). Failure-to-follow-through on new all-time highs generally generates strong moves in the opposite direction and when added to the fact that the indexes are in a downtrend it makes NTES look particularly attractive on the short side.
In addition, the week the new all-time high was made, was a "key" reversal week (higher highs, lower lows, and a close below the previous week's low) and that likely means the stock not only found a longer-term top but now has to determine where new buying is likely to come in, not something that is readily evident at this time.
NTES is a stock that has basically traded between $13.50 and $24 for the last 3 years, with only two short incursions up above $25. With the stock market in a downtrend, it seems highly likely that this stock will be getting back into that trading range for the near future.
Resistance will now be very strong at 21.84-22.08. Some decent resistance will also be found between 21.18-21.48 as well. Support will be decent (leaning toward minor) at 19.89, both from a previous low at that price as well as from a psychological basis. Strong support will be found between 16.87 and 17.34 where there are many previous lows as well as the 200-week MA. Major support, on a weekly closing basis, is found between 14.40 and 14.67.
With the failure to follow through on the new all-time highs as well as the indexes on a downtrend, it is unlikely that NTES can muster any rally strength. In addition, the psychological support at $20 is not likely to hold as psychologically speaking the general market feels prices are heading lower overall. A break below the $20 suggests that the stock will get down to test the 200-week MA down around the low 17's.
Sales of NTES between 20.81 and 21.28 and using a stop loss at 22.18 and having an objective of 16.87-17.34 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).
HON (Friday closing price 49.23)
HON broke down, in a dramatic fashion, below a 1-year sideways trend between $52 and $62 the stock had been under. Such a dramatic break is not one that is likely to be reversed any time soon, especially under the economic conditions the stock market is presently seeing. In addition, HON had just finished making a new all-time high at 62.99 just 6 weeks before. The drop of over $14 was the biggest move the stock has seen, in either direction, since the stock broke out in April of last year when it rallied from $45.50 to $59, over an 8 week period of time.
If the indexes do generate an early week rally, tt is possible the stock this week will try to test the breakdown level up at $52. Nonetheless, there is no support on the chart until the 200-week MA is reached down at $45 and therefore it is likely there will also be follow-through to the downside this week as well.
Resistance will likely be decent at the previous low of 52.05 (53.19-54.00 on a daily closing basis). There is also some resistance at the gap area the stock left open on the way down between 51.09-51.22. Under the conditions of the break, the gap area will likely act as a strong resistance. Support in non-existent until the $45 area is reached where the 200-week MA is currently at. On a daily closing basis, the support will be found between 45.96-and 46.06. If that level is broken, there is nothing in the way of support until $36-$40.
This is a high probability trade but finding the right entry point and stop loss may be quite difficult. The stock had a $6.70 trading range for the week. Evidently if you start trading above the middle of that trading range, the possibilities increase that the stock will head higher. The mid-point of the trading range is 51.78. In looking at the possible objective being $45 and looking at the week's trading range of $6.70, it comes up with a possible high of the week being 51.70. Nonetheless, the gap at 51.09 will also be considered resistance.
Sales of HON between 51.00 and 51.70 and placing a stop close only stop loss at 52.50 and looking for a 45.00 objective, will offer at least a 4-1 risk/reward ratio.
My rating on the trade is a 7 (on a scale of 1-10 with the strongest probability rating being 10).
Added Bonus Mention
There is one stock that offers clearly defined support/resistance levels on both sides of the coin. As such I am mentioning trades on both sides but I am more partial to the long side than the short side on this stock. Since this is a bear market long positions do not have a high probability rating so I am mentioning this stock as a good "flyer" with decent risk/reward ratios. I am planning to trade this stock on both sides of the coin if the stock rallies first, but like I said above, I am more partial to the long side than the short side.
CAG (Friday closing price 19.67)
CAG was hit this week with an earnings report that disappointed the street. Not so much because it was negative (it wasn't) but because a large part of the profit the company enjoyed was due to a commodities trading firm the company sold. Such profits will not be seen on the next earnings report and because they are a food manufacturer and commodity prices are sky rocketing, it likely means they will get a negative earnings report next time around.
CAG is a very well-established company with products such as Chef Boyardee, Healthy Choice, Marie Callender's, Orville Redenbacher's, Slim Jim, Hebrew National, Kid Cuisine, Reddi-Wip, VanCamp, Libby's, LaChoy, The Max, Manwich, David's, Ro*Tel, Angela Mia, Hunt's, Wesson, Act II, Snack Pack, Swiss Miss, PAM, Egg Beaters, Blue Bonnet, Parkay, and Rosarita. These are all products sold in the stores that are well-known and not likely to suffer declines in purchasing through a downturn in the economy. In addition, with inflation going up and the cost of living increasing as well, it is more likely that there will be more eating at home than going out.
The earnings report caused a reversal week as well as a move down of over $3.50 and with the fact the stock closed on its lows, it will likely have additional downside follow-through this coming week.
Resistance will now be quite decent between 21.00 and 21.45, on both the daily and weekly closing charts. There are two previous daily and weekly high closes and more than 4 previous daily low closes between 21.00 and 21.45. Some resistance will also be found at 22.00 and then again a bit stronger at 23.00. Support on a weekly closing basis is very strong down at 19.50 (19.33 intra-day) and then again just as strong at 18.25 (17.50-18.13 intra-day).
CAG is a big well-established company that for the last 8 years has traded between a low of $18 and a high of $30. Though the stock is now under a lot of selling pressure, most of it technical and chart oriented, it is not likely the stock will fall much more as the fundamentals of the economy are not likely to disrupt people's desire to eat.
Purchases of CAG between 17.50 and 18.12 and placing a stop loss at 17.30 and having a minimum objective of 21.45 would offer a risk/reward ratio of at least 4-1. Should the stock drop down to those levels, the upside could be much higher for the long-term.
It is possible, though, that CAG will drop down this coming week only to the most recent low (May 2006) at 19.33 (19.50 on a daily closing basis) and rally up to the 21.45 level. If that is what happens and the 19.33 holds up, you could do a short-term trade with a purchase at 19.51, a stop loss at 19.23 and an objective of 21.00-21.45. Such a trade would also offer a 4-1 risk/reward ratio. If stopped out, then the original entry point would generate a new re-entry into the trade. By the same token if the stock rallies up to 21.00-21.45 first, you could consider a short-term sale with a stop at 22.18, looking for a drop down to at least 19.50 if not down to the 18.13-17.50 level.
My rating on the trade is a 6 (on a scale of 1-10 with 10 being the most probable).
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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 dropped down near the strong support at 15.00 on Friday and was able to rally to close above 16.00 and on the highs of the day. If the indexes are able to rally at the beginning of the week it is likely that NUAN will rally as well and there is no resistance of consequence until 17.15-17.33 is reached. Nonetheless, if the indexes make new lows this coming week, as anticipated, it is likely the stock will get back down to the 15.00 level. Drops down to 14.87 can still be seen. Purchases between 14.87 and 15.53 can be made as the possibilities of that area holding up, even during a strong drop in the indexes, is good. ELON has now reached a major level of support that should hold up. Drops down to 10.98 are still possible. Even if the indexes make new lows (probable) this stock should start showing an ability to go against the grain. Probable trading range for the next week or two is 10.98 to 12.47. STP broke down this past week and closed below the 200-week MA. Such a break, if confirmed next week with another close below 40.24, will keep the stock under pressure and in a trading range between $35 and $41 for several weeks at least. The 34.90 level is now very important support and if broken a drop down to close an open gap at 30.80-31.79 is probable as that level will become a magnet. The 38.25 level is now going to be resistance but if able to get above that, the stock should rally up to $40-$41. The 36.90-37.48 area will also be considered resistance from previous low daily closes and if unable to generate a daily close above those levels selling pressure will increase. The probabilities of a drop down to 34.90 this week are high. YGE broke down as well and now seems destined to drop down to the 14.73-15.33 level at some point this week. There is a gap between 14.73 and 14.82 that is now a magnet and by being so close, the gap is now likely to be closed. Resistance will now be strong at 18.18 and 18.93. The solar stocks have been under pressure due to the inability of the Senate to extend solar tax credits. For the time being it is likely that the solar companies will continue to trade sideways to down. ORB is likely to stay under selling pressure this week while the indexes keep going lower. Nonetheless, the support at 23.00, on a daily and weekly closing basis, is very strong and not likely to get broken even if the indexes drop. A close above 24.73 would be strongly positive while a close below 23.00 would be negative. Likelihood of the stock continuing to trade within that range is high. ANGO traded sideways this week with a slight upward bias. Nonetheless, the stock has been unable to get up or close above 14.00 and has shown a propensity to trade between 13.64 and 13.87, on a daily closing basis, for the last week. A close below 13.64 will generate further downside while a close above 14.00 further upside. This is not a stock that follows the indexes so it has to be traded on its own. No direction was given this week. RIO remained under pressure this week from the drop in the indexes but held on to some strength because of the increase in commodity prices. The 200-day MA is currently down at 34.47 and if broken, the stock would likely fall. On the other side of the coin a close above 36.68 would likely be strongly positive. With the stock closing at 35.48 on Friday, it is right in the middle of that trading range. No direction was seen this week. The stock will likely rally if the indexes get down to their downside objectives and the stock has not broken below 34.47. JNPR continues to be under pressure due to the falling indexes but has been able to maintain itself above the recent lows and has shown a desire to hold these prices. Friday's close was once again below the previous low close of 22.83 but only by 20 points. The week prior, JNPR also closed below 22.83 (closed at 22.74) and from a technical basis it can be said the break was confirmed. Nonetheless, there was no follow through of any consequence and if the stock is able to get above 23.68 this week it is likely to generate a decent rally and reverse the break. A drop below 21.92 though, would be bearish and generate further downside. BA got a downgrade this past week and broke the support up at 72.45 as well as the neckline of a massive weekly head & shoulders formation. In addition, the stock made a new 28-month low. Support on the way down is minor until the $60 level is seen. Nonetheless, there is some support at 65.90, 64.64 and again at 62.05. Objective of the head & shoulders formation is $40, over a period of 3-6 months. Resistance will now be major at 72.45. This is a stock that will likely have some correlation with the indexes so when the indexes reach their objectives, this stock should be evaluated for a possible short-term liquidation. INTC broke below the 20 and 100 week MA as well as the 100-day MA this past week and got into the gap it left on the way up from 20.94 and 21.81 with a drop on Friday to 21.22. Closure of the gap is highly likely and there is no support of consequence until 20.50 is reached. On a daily closing basis the support at 20.50 is decent but on an intra-day basis it is considered minor. Strong support intra-day is not found until 19.44-19.62 is reached. Resistance will now be strong between 21.75 and 21.82 and then again at 22.00 where the 100-day MA is currently located. Possible (maybe probable) trading range for the week could be 21.79-19.97.
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1) INTC - Shorted at 22.66 and then again at 21.77. Averaged short at 22.215. Stop loss still at 23.20. Stock closed Friday at 21.49.
2) ANGO - Shorted at 15.90. Stop Loss lowered to 15.25. Stock closed on Friday at 13.86.
3) JNPR - Purchased at 23.50 Averaged long at 23.735. Stop loss now at 21.82. Stock closed on Friday at 22.64.
4) ELON - Averaged long at 12.41. No stop loss at present. Stock closed on Friday at 11.11.
5) ORB - Purchased at 25.39. No stop loss at present. Stock closed on Friday at 23.85.
6) STP - Averaged long at 43.97 (2 mentions). No stop loss at present. Stock closed on Friday at 41.31.
7) STP - Liquidated long purchased at 41.87 at 39.92. Loss on the trade of $195 per 100 shares plus commission.
8) RIO - Purchased at 36.03. No stop loss at present. Stock closed on Friday at 35.49.
9) YGE - Averaged long at 21.90 (2 mentions). No stop loss at present. Stock closed on Friday at 16.16.
10) SNDA - Liquidated at 27.70 Purchased at 29.54. Loss on the trade of $184 per 100 shares plus commission.
11) HAL - Shorted at 51.76. Covered Short at 51.77. Loss on the trade of $1 per 100 shares plus commissions.
12) FTEK - Liquidated at 19.81. Averaged long at 23.01. Loss on the trade of 1280 per 100 shares (4 mentions) plus commissions.
13) ITG - Liquidated at 35.97. Averaged in at 37.05. Loss on the trade of $216 per 100 shares (2 mentions) plus commissions.
14) BA - Shorted at 72.45 and then again at 69.77. Averaged short at 71.11 (2 mentions). Stock closed on Friday at 66.92.
15) VLO - Purchased at 43.00. Liquidated at 42.15. Loss on the trade of $85 per 100 shares plus commissions.
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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