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Issue #58 
February 10, 2008 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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| Downtrend To Continue But Choppy Two-Way Trading Expected!
DOW Friday close at 12182
The DOW sustained a 500 point drop this past week, after having had a 500 point rally last week, but was able to hold on to its recently established weekly and closing day supports at 12099 and 12112. The mirror-like up and down action over the last two weeks likely means the market is waiting on further news before making any major decsisions. The downtrend is still in place and expected to continue. The action, though, is likely to be two-way, choppy, and volatile but with a downward bias.
On Friday, the sellers tried to break the weekly closing support level at 12099 with an intra-day drop down to 12103 but failed to accomplish their goal. Nonetheless the DOW finished the week near the lows and the likelihood of the downtrend resuming next week is strong.
Resistance was once again confirmed to be major at the 12763-12790 level. After having reached that level at the end of the previous week and closing right on the highs of the week, the index was unable to generate any further upside action, not even on an intra-day basis, and gave up all the gains it had obtained the previous week. Support, on a daily closing basis, will be found at 11940 (strong) and at 12050-12070 (minor). In addition, the 12112 level, also on a daily closing basis, will likely act as a pivot point during the week, helping to generate rallies up to 12500 or down to 11940. Resistance will be found at 12319, 12379, and now quite strong at 12481.
Since the DOW is in a bearish trend or, at best, having a "temporary" sideways pause with a bearish tint attached, the burden of proof continues to lie on the shoulders of the buyers. With the inability of the DOW to maintain the rally from the previous week, the sellers hold the upper hand and will likely continue to be successful in pressuring the index. It is probable that for the next two weeks the index will trend slightly lower and test the recent intra-day lows, while waiting for the next Fed news due out the last week of the month.
The 12481-12500 level has now likely become strong resistance and since the last two weeks have shown a range of 500-600 points it is likely that next week's range could be something like 11940-12481. This range would satisfy the slightly lower trend scenario.
Whether the strong support at 11940 gets broken next week or not, is not something that can be easily speculated upon at this moment. With options expiring next Friday, expect volatility. Nonetheless, the likelihood of the DOW holding above support and below resistance is high.
NASDAQ Friday Close at 2304
The NASDAQ had a negative week and was the leader of the indexes on the way down. The NASDAQ on Wednesday made a new 16-month daily closing low that put the index totally on the defensive and fighting for survival. During the last two trading days of the week, the break of support was not confirmed but neither was the index able to give a failure-to-follow-through signal thus leaving it in a wait-and-see-next-week situation.
Resistance, on a daily closing basis, will now be quite strong at 2341-2361. Major resistance is up at 2400, much like the DOW at 12767, but the likelihood of a rally intra-week up to that area is almost nil. Support is almost non-existent until the 2159 level is seen on a daily closing basis, and even then, that support is minor in nature.
The probabilities are that for the next two weeks, much like with the DOW, the NASDAQ will be trending slowly lower. Nonetheless, without any previous support near-by on the charts, it is difficult to speculate at what price level the index will find buying. Using this past week's 160 point range (2413-2253) and considering that the 2341-2361 will act as strong resistance, it can be speculated that a low around 2180-2200 could be seen this coming week.
S&Poors 500 Friday close at 1331
The SPX, much like the DOW chart, was able to hold itself above the previous and recent daily and weekly closing lows at 1270 (intra-day) and 1310 (daily close). Nonetheless, the index has now been under the 100-week MA for 4 weeks and the MA has now been tested twice successfully. The index is now testing the support levels to see if they are able to hold. The probabilities are that they won't.
With the negativity surrounding the cross of the 20 under the 50 week MA and the action seen the last time it happened back in 2000 (2-year downtrend), the SPX is totally on the defensive and trying to prevent it from happening this time around. Nonetheless, the action this past week did nothing to dispel those fears.
Resistance in the SPX, on a daily closing basis, is found at 1352 (strong) amd at 1395 (major). On an intra-day basis, the 1370 level looks like a wall. In addition, the 20-day MA is around 1352 giving that resistance level added strength. Support is at 1270 on an intra-day basis and at 1310 on a closing basis. Below 1270 there is no support until the 1237 level is reached.
In looking at the chart back in 2000 it seems probable that for the next couple of weeks, like with the other indexes, that the SPX will tend to trend lower with lower highs and lower lows than the previous week. In December 2000 the index hit a low of 1254 and subsequently had a rally back up to 1383 before taking a strong drop down to 1081. For some reason the drops this year seem to be stronger than in 2000 and therefore it is possible to surmise that a drop down to 1219-1237 (present support level on the chart) will be seen, followed by a possible rally back up to the 1350-1370 level thereafter.
Overall, though, the chart continues to look bearish and at this time there is no chart reason to think the downtrend will not continue, though perhaps over the next couple of weeks not as strong as the drop seen a couple of weeks before.
It seems highly probable that the indexes are going to resume their downtrend but perhaps not with the same panic driven selling seen over the past few weeks. Peaks and valleys, with a bearish tone, should be expected until after the FOMC meeting this month. There doesn't seem to be any positive fundamental news in the offing and it is now been stated that the economy is officially in a recession. Rallies are likely to be short-lived until the scenario changes.
Probabilities are high that, for the foreseable future, news will continue to have a bearish tone. As such, all rallies will continue to be heavily sold.
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Stock Analysis/Evaluation
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CHART Outlooks
This coming week will likely be tough to pick charts that offer a lot of short-term value. With the indexes likely to trend lower but in a choppy fashion, shorts will continue to be the favorite play but won't necessarily offer large or immediate profits.
TRLG (Friday Close at 18.41)
TRLG is a stock that back in 2005 traded in a range between $11 and $18 for the year. At the end of 2005, the stock rallied up to 24.36 and set itself into a trading range between $24 and $14, that has been in existence since then. Based on the recent action (last 2 months) it seems that TRLG is heading down to test the $14 low of the range and perhaps even get itself back into the trading range between $11 and $18 that was in existence back in 2005.
On December 24th TRLG saw a high of 22.00 (re-test of the previous high at 23.74 made in August) and within two weeks dropped down to 16.46 in what now seems to be the flagpole of an inverted flag formation. During the past 4 weeks the flag has been in the building process and during this time the stock has rallied back up to 19.80 where it seems to have encountered strong selling resistance, from 5 previous highs made around that price over the past 8 months. In addition, even prices such as $20 always offer strong psychological resistance as well. The inverted flag formation now seems to be in place with Friday's rally up to 19.40, seen as probable failed re-test of the 19.80 high.
Resistance is now very strong at 19.63-19.80 and then again at 20.13, both form intra-day highs. On a daily closing basis, major resistance is at 19.52 and very strong at 19.01. Support is very strong at 18.00, on a daily closing basis. At that price there are two previous daily closes of consequence as well as the 20-day MA. Below that, the 16.84 level will also offer strong support but breaking that support would probably thrust TRLG down toward the 15.38 level. On a weekly closing basis, no major support is shown until the 17.00 is seen, but if broken no other support of consequence is found until the 15.00 level is seen. Below that level nothing of consequence until 11.97.
Even though the stock has been in a sideways trend for the last 3 years, it is showing tendencies toward getting into a short-term downtrend that will take it back down at least to the low side of the sideways trend. In addition and on the weekly chart, the 15.00 level shows a triple bottom and triple bottoms normally get taken out. The potential for a drop down to the $11-$12 level has increased strongly at this time with the inverted flag formation that offers as an objective the 14.40 level and a break of the 15.00 level of support.
Sales of TRLG between 18.84 and 19.31 and placing a stop loss at 20.23 and having an objective of 14.40, offers a risk/reward ratio of 4-1.
My rating on the trade is a 7.5 (on a scale of 1-10 with the strongest probability rating being 10).
SVNT (Friday close at 20.57)
SVNT is a stock that has produced a drug for curing Gout that recently passed Phase III tests successfully. Phase III tests are the last phase needed before being able to market a drug. SVNT plans to request FDA approval this year and with the successful completion of all Phase tests, approval is just a formality. Several analysts have given a $27 dollar price target for the company.
SVNT rallied aggressively, immediately after the announcement, from $15 right up to a high of 24.52 but has been retracing its gains recently. The likely cause of the recent weakness is the indexes downtrend as well as a need to build a support base from which to generate the next rally upward.
Support in SVNT is strong at the most recent low at 18.35 and at 19.60 where the 50-day MA is currently at. Minor resistance is now found at 21.50-21.80 (two recent highs) and then up at 24.52 (the recent all-time high).
The weekly chart is looking very bullish since the announcement was made. The formation currently in place is a flag with the flagpole starting at 11.70 and ending at 24.52 and the flag is the current action between 24.52 and 18.35. A break above the top of the flag at 24.52 would give an objective of $31.36. With analysts giving price targets for the stock of $27 and higher, reaching the $30 level does not look insurmountable at this time.
Evidently the current economic conditions in the marketplace as well as the negative chart scenario of the indexes makes purchasing any stock a scary proposition. Nonetheless, I do believe that the recent move down in SVNT has been caused by the indexes but further deterioration is not likely to happen due to the benefits of having a cure for Gout. Medical breakthroughs such as this tend to bring high profitability to companies and it has been stated that this Gout drug will bring peak sales of $720 million to the company. Under this scenario and even if the stock indexes keep going down, it is likely that SVNT will hold much of its price value.
Purchases of SVNT at 19.62-19.75 and placing a stop loss at 18.25 and a minimum objective of testing the highs at 24.52 will offer a risk/reward ratio of 4-1. If the flag objective of 31.26 is reached the risk/reward ratio will have skyrocketed to over 8-1.
My rating on the trade is a 7 (on a scale of 1-10 with the strongest probability rating being 10).
AMKR (Friday closing price 8.23)
AMKR, from Oct06 to Jul07 rallied from a low of 4.92 to a high of 16.79. Since Jul07, though, the stock has been giving up all of its previous gains and now finds itself back under $10 and with a chart formation that points to a re-test of the original up-trend start point at 4.92. Over the last 8 months the downtrend has been consistent and all rallies have failed to get above a previous rally high. At this time there is no reason to believe the downtrend is over.
In addition, AMKR recently gapped down from 10.11 to 9.59 and the stock has tried on several occasions to close the gap unsuccessfully. The last attempt took the stock up to 9.24 but the failure to go further upward caused a drop down to an important previous daily closing high from back in Jan05 at 6.70. The successful re-test of that drop has put AMKR into a short-term up-trend that seems to be reaching levels of resistance that are unlikely to break.
Resistance is very strong at the most recent weekly and daily high at 9.24. In addition, the 20-week MA is currently right at 9.13 and dropping. On a daily closing basis, the 8.84 level is considered strong resistance as well. Support is found down at the recent low of 6.14 (6.69 on a daily closing basis). Below that there is no support until the 4.65-500 level is seen (5.05 on a daily closing basis).
There is a gap that was left open on the way up between 5.71 and 6.14 that has now become a magnet and if the indexes continue their downtrend (likely) the probabilities of the gap being closed are high.
Sales of AMKR between 8.55 and 8.60 and placing a stop loss at 9.34 and an objective of 5.00 will offer a 4-1 risk reward ratio.
My rating on the trade is a 6.5 (on a scale of 1-10 with the strongest probability rating being 10).
ABB (Friday closing price 23.46)
ABB is in a very evident short-term downtrend as well as a full-blown correction from the highs made back in November. It is nearing breakdown levels that would turn the correction into a mid-term downtrend. After starting a 2-year rally on back on Oct05 at 7.50 that culminated at 32.08 on Nov07, the stock has corrected back down as low as 21.69 and gotten into a very evident correction that has the earmarks of a mid-term downtrend. ABB went down to the 50-week MA this past week and if that line is broken the correction will likely turn into a full-scale downtrend.
During this time, the $25 level seems to have become somewhat of a pivot point and the stock has fluctuated recently both above and below that price level. Nonetheless, the move down this past week below the $25 level came with a gap opening down breaking the 20-day MA it had broken above just last week, and at the very minimum seems to heading down to test the 21.69 intra-day low made just a few weeks ago.
Resistance is now very strong at 26.14 (26.00 on a daily closing basis) and decent at 25.45. In addition there is a previous high at 24.85 that connects well with the gap down opening at 24.70 as well as the dropping 20-day MA, currently at 24.61. These three price points put together make that entire area a decent resistance level as well. Support is minor at 22.57 (23.18 on a daily closing basis) and strong at 20.42 (21.99 on a daily closing basis). In addition the 50-week MA, currently at Friday's closing price of 23.49, could be seen as support as well.
ABB did close on Friday below a previous low weekly close at 23.68 and looks like it is ready to begin changing from a correction to a down-trend. If the 50-week MA is broken and the stock is in a downtrend, the likely objective would be the 100-week MA currently right around 18.90. A weekly close below 21.99 shows no weekly closing support whatsoever until the 16.52 level is reached, and even then that support level is considered minor.
The trade is pivoting on whether the stock is in a corrective phase or in a downtrend. I personally believe that a break of the 50-week MA will place the stock in a downtrend, as such the previous weekly and daily support levels mentioned above are likely to get broken. If the stock is still in a correction, the break of the 50-week MA still looks likely but the $20 level of support will likely hold. Either way the trade seems to have a good probability factor.
Sales of ABB at 23.80, placing a stop loss at 24.80, and having an objective of 18.98 will offer a risk/reward ratio of almost 5-1. Even with an objective of only 20.42, the risk/reward ratio would still be 3.5-1
My rating on the trade is a 6.5 (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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NTES continues to look weak as the downtrend is still in effect. A daily close above 17.63 would be a positive signal and a close below 17.14 will signal the downtrend is still ongoing. Based on the likelihood of the downtrend continuing in the indexes, it seems quite possible that the stock will get down this week to 16.53, on a daily closing basis. CAT was unable to close above 68.63 on Friday and that is a negative. On a weekly closing basis that signals a possible move down to the 62.81 level this coming week. On a daily closing basis, another close below 67.73 is needed to resume the downtrend, whereas a daily close above 68.32 will probably stimulate a bit of a rally. No resistance of consequence, on a daily closing basis, until 71.76 but on an intra-day basis the 70.00 level looks pretty strong. JNPR was able to close the gap down it left on Thursday and managed to close above the 25.00 pivot point level, on a daily closing basis. The 25.00 level has proven to be a semi-important pivot point, on a daily closing basis, for the last year. Nonetheless the stock has often closed a bit above or a bit below that level without giving any change of direction. On a weekly closing basis, though, JNPR was unable to close above 25.95 (previous weekly closing low) in order to negate the recent break, and the weekly chart continues to say it's a strong sell. The 100-week MA is at 22.75 and a close below 24.60 will likely thrust the stock down to that level this coming week. Resistance is very strong now at 27.65-27.73 (intra-day) and at 27.25 on both a daily and weekly closing basis. This is a stock that has wide ranges and it is impossible, at this time, to give you any resistance of consequence closer than the ones up above. CHINA held the previous low weekly close at 3.82 with a close this past Friday at 3.92. The stock continues trying to build a support level of consequence but is not getting any help from the indexes. A drop back down to the 3.74 level is still possible and now even likely probable. Any break of that support level followed with a daily close below 3.62, would constitute a sell signal of consequence. Keep a close eye on this one. KO has a very bearish chart formation as it is presently shoring an inverted pennant. In addition, on Friday the stock gapped up and this is not a likely gap area which means the stock is likely to go down to fill the gap increasing the probabilities of heading lower thereafter. A break below 57.24 would break the bottom of the pennant and likely generate further downside. The objective of the break of the pennant is 47.83. Resistance continues to be very strong between 59.65 and 60.34 and the 20-day MA is currently crossing below the 60.00 level. With the bearish looking chart I do not expect any further upside to KO, even if the indexes mount a small rally. ITG has built what could be a strong top or a bullish flag formation. Both of these formations are in place and a break above 47.00, on a daily closing basis, could generate a rally up to the 65.00 level. By the same token a close below 44.83 will confirm the top formation and likely generate a move back down to 38.50. Neither of these formations are to be fooled with as they are clearly defined and will likely generate the action called for if broken. The stock, on a daily closing basis, has been very successful is staying above the 50-day MA and on Friday the stock came within a cat's whisker of breaking above the 47.00 level. At this particular moment, I cannot even give you a probability number on which way I believe the stock is heading. During the week the stock was looking quite bearish but the rally on Friday was totally unexpected and left everything up in the air. In addition, on Friday, both the support and resistance levels of the formation were tested with a low at 45.23 and a high at 46.93. Such action means that the traders also seem to be clueless as to what direction the stock will take from here on in. Keep a very close eye on the stock next week and do get out of the shorts if the stock closes above 47.40 (I am using 47.40, on a daily closing basis, just to give myself a "bit of room", just in case of a manipulated false breakout).
WIND continues to waddle down at the support levels near 8.00 but the reality is that the chart has lost a lot of strength because of the failure-to-follow-though signal given when the stock broke above the resistance level at 8.65. At this time it seems that the only hope is for a sideways market but breaks below 8.00 will begin to weaken the chart and give an objective of 6.00 to the downside. A close above 8.88 is needed to re-stimulate the upside. JNJ broke below both strong supports (62.18 and 62.46) on Friday. The 62.46 level being support on a weekly closing basis, and the 62.18 level on a daily closing basis. There is alsoo some minor support at 61.83, on a daily closing basis, but below that nothing important until the 60.73 level is seen. The chart continues to look bearish and 60.00 continues to be the objective. I do believe the 60.00 will generate some correction upward, but thereafter I think the stock will head down to the 57.00 level. 63.07 is now a decent resistance and 63.87 is now major.
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1) KO - Shorted at 59.64. Stop loss at 60.44 stop close only. Stock closed on Friday at 59.25.
2) JNPR - Shorted additional positions at 24.80. Now averaged short at 27.95. Stop loss lowered to 27.89. Stock closed on Friday at 25.46.
3) CAT - Shorted at 67.72. No stop loss at present. Stock closed on Friday at 68.01.
4) NTES - Shorted at 19.35. Stop loss lowered to 18.70. Stock closed on Friday at 17.60.
5) CHINA - Purchased at 3.93. Stop loss at 3.56. Stock closed on Friday at 3.92.
6) WIND - Purchased at 8.32. Stop loss lowered to 7.78. Stock closed on Friday at 8.16.
7) FCEL - Liquidated at 8.65. Profit on the trade of $149 per 100 shares after commissions.
8) ITG - Shorted additional positions at 46.17 and 46.89. Stop loss at 47.50. Stock closed on Friday at 46.40.
9) JNJ - Shorted at 63.70. Stop loss at 64.20. Stock closed on Friday at 62.03.
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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