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Issue #60 
February 24, 2008 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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| A likely decision week ahead!
DOW Friday close at 12381
As expected and mentioned in last week's newsletter, the action in the DOW this past week was muted and without reflection of any short-term meaningful direction. The trading range for the week was the smallest since the last week of December and showed a marketplace that is searching for clues as to what to expect for the next few months. Both the near-by support and resistance levels were tested this week and the end result was the likelihood of more of the same next week.
Both of the near-by support and resistance levels were tested this week with the resistance at 12504 being tested twice and the support down between 12112-12182 being tested once. By the end of the week the DOW closed almost in the middle of that range and gave no hint as to what to expect next week. Major resistance continues to be up at 12767-12790 and major support down around the 11940-12000 level. Additional support at 12060-12112 and additional resistance at 12573.
It is evident, though, that the DOW's trading range continues to shrink in a pennant fashion. This past week, the range between the high and the low was 349 points, the previous week it was 506 points, and the two previous weeks before that the range was 665 points. With the ranges this past week being totally within the range of the previous week, it seems likely that a breakout of the pennant formation, in either direction, will generate some follow through. Such a break though (a move above 12504 or a move below 12155), would most likely generate only short-term action (a week or two) as neither the major support or major resistance is close at hand
In looking at the weekly chart, the probabilities continue to favor a resumption of the downtrend. The DOW is still trading below the 100-week MA and the chart has not shown enough strength to the upside to give the bulls enough technical strength to generate a strong buying rally. In addition, the downtrend is only on the second wave down or what is likely a three-wave move. The first wave was a drop of 10% followed by a corrective rally of 8%. The second drop was 16% and has been followed, so far, by an 11% rally. Following the mathematical formula, it could be said that the third wave could be as much as 22% followed by a 14% rally thereafter. A drop of 22%, using the recent high at 12767, would give a downside objective to the DOW of 9957 (a figure my charts have shown to be a very viable objective).
It is important to note that "all" the upside action over the past 4 weeks, has generally been caused by timely news items rather than a strong change of long-term fundamentals. It has seemed that the bulls have enjoyed a charmed life as every time that the market has seen itself on the brink of resuming the downtrend, some news item has been released that generates a short-term rally. Manipulated damage control immediately comes to mind. The first news item that stemmed the tide of selling was the Fed lowering interest rates 125 basis points over a two-week period of time. The second news item was the involvement by Warren Buffett and his proposed injection of billions of dollars into the market. The third and most recent news item came out in the last 30 minutes of trading on Friday and it involved the announcement of a proposed bailout of troubled bond insurer Ambac Financial. In each of these cases, the indexes were under strong selling pressure and only the announced news prevented the indexes from breaking down further.
All of these actions have seemed only to be damage control and not positive fundamental changes that will help long-term investor confidence. In every case, the rallies generated by news releases, have fallen short of breaking resistance levels of consequence thus proving themselves to be only stop-gap solutions. It can be said, that the need for these stopgap news releases reflects on just how bad the fundamental situation really is.
NASDAQ Friday Close at 2303
The NASDAQ continues to be the weak sister of the three leading indexes as it was the only index that closed lower than last week's close and the only index that made a new 16-month weekly closing low. In many ways, the NASDAQ reflects the "general" market conditions better than the other indexes as this is not an index that is normally used as a hedge against specific industry weaknesses but as an indicator that reflects the general malaise that the economy is suffering from.
The weekly chart of the NASDAQ continues to show strong weakness and the price rallies seen in the DOW, off of the news releases, have not generated commensurate upward response in the NASDAQ as they have done in the other indexes. On Friday, for example, the news regarding the proposed bailout of Ambac Financial, which generated an upward move of close to 200 points in the DOW, failed to generate a close above a proven-to-be-important pivot point at 2305 in the NASDAQ. In addition, the index made a new 16-month weekly closing low on Friday. Based on the fact that the NASDAQ seems to be reflecting the general outlook for the entire marketplace, the failure on Friday is one to take note of.
Major resistance in the NASDAQ, on a daily closing basis, is found at 2404-2413. Strong and important resistance is found at 2371-2374. Unless the NASDAQ is able to close above this latter resistance level, it will continue to look weak and with high probabilities of further downside. Support is presently found, on a daily closing basis as well, at 2292 and 2279. Below 2279, there is no visual support of consequence until the 2073 level is reached.
On Friday, from 12:15pm to 3:30pm, the NASDAQ traded below the 2279 level of important daily close support and in all likelihood would have closed below that level, thus breaking that important level of support, if not for the news release late in the day. Such action, and especially when based on the nature of the news release, does not support continued miracle rescue efforts. The chart of the NASDAQ is heavily tilted toward further downside action. The close on Friday, below the important pivot point at 2305 and only 24 points above an important breakdown level on the closing basis chart, leaves the index with the barest of probabilities of being able to survive this coming week unscathed.
The 2305 level will continue to be an important pivot point next week and if the index is unable to close above that price on Monday, will likely generate further downside movement and a break of the 2279 level of daily closing support.
On the upside, any intra-day movement above 2354 this coming week will strongly reduce the selling pressure for the short-term.
S&Poors 500 Friday close at 1353
The SPX chart is quite similar to the DOW chart in recent action but totally dissimilar in the fact that it broke its Mar07 support several weeks ago, whereas the DOW chart still shows that index holding that same date support. The SPX is still in a strong downtrend and the recent sideways pause has not been able to cast many doubts regarding the continuation of the downtrend.
The index continues to trade way below the 100-week MA and this past week broke below the 20-day MA, like the DOW, and continued to show that the index is looking weak.
Resistance in the SPX is decent at 1367 and very strong at 1395, both on a daily closing basis. Support is decent at 1326, and then stronger at 1311, once again, on a daily closing basis.
The SPX did trade, intra-day, down to test the 1326 level of support but did rally late in the day, as all the indexes did, to close right below the 20-day MA it had broken below this past week. A break below the previous low at 1311, on a daily closing basis, will give an objective of 1196.
Even though the action this past week did not end up clearly resolving the short-term direction of the indexes, there is still reason to believe that the indexes are getting ready to head lower. The fact the trading ranges have diminished and will likely cause a break this coming week as well as the fact that the weakness on Friday had to be resolved with timely news rather than with overall fundamental buying, makes it a high probability to happen this coming week. Unless further last minute heroics happen, the selling pressure should resume once more on Monday.
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Stock Analysis/Evaluation
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CHART Outlooks
Shorting stocks continues to be the preferred option, based on the charts. Until the market can prove convincingly that the buyers are back in control and able to generate an up-trend, selling is likely to be the most profitable way to go. Nonetheless, since this week is a likely decision week, only stocks with very clearly defined trends and small risk factors will be used.
SBUX (Friday Close at 18.25)
SBUX has been in a major downtrend of consequence over the past 15-months since it reached a high of 40.01. The stock has broken several major support levels on the way down (the most recent the most major support at 22.98 as well as another important support at 22.49) and now finds itself struggling at the last support level of any consequence before a drop down to the $15 level. The stock has not shown any ability to generate any kind of a rally of consequence during this downtrend.
During the last 7 weeks, SBUX found a support level that was able to turn the downtrend into a temporary sideways trend as the stock has been trading between a low of 17.66 and a high of 21.01 for this period of time. Nonetheless, this past week SBUX closed below the lowest daily closing price at 18.15 on two occasions. On Friday the stock was unable to close below the 18.15 weekly support as well, thus failing to confirm the daily break of support showing on the daily chart. Nonetheless, the stock traded all day below that level and if it wasn't for the late rally in the indexes, it is highly likely the break of weekly support would have occurred.
Support had been consistent during the past 7 weeks between 18.11 and 18.26, on a daily closing basis, but that level had been seen on 4 different occasions and such a conglomeration of low closes around the same price made the area very likely to be broken to the downside. It did happen this past week. Below the $18 level of support there is no major support in the stock until the $10 level is reached. Some minor support will be found at 15.04 but only enough to slow the decline down for a week or so. Resistance has been trending lower recently, as each previous high close has been lower than the previous one, at 20.45, 19.97, 19.10, 18.85, and the most recent this past week at 18.29. The most recent intra-day high was at 19.25 and that rally went up exactly to the 20-day MA and failed to get above it. Strong resistance, on a weekly closing basis, is seen at 19.76.
With the indexes likely to resume their downtrend and SBUXshowing definite signs of weakness this past week, it seems highly likely the stock will continue to break down to the next minor support level at 15.10. Further daily closes below the $18 area will bring in new and likely aggressive selling this coming week.
Sales of SBUX at Friday's closing price of 18.25 and placing a stop loss at 19.35 and an objective of $15.01 will offer a risk/reward ratio of 3-1. The likelihood of the minor support level at 15.04 breaking is high and therefore a drop down to the $10-$11 area is also a high possibility. Such a drop will increase the risk/reward ratio to 6-1.
My rating on the trade is a 7.5 (on a scale of 1-10 with the strongest probability rating being 10).
SWKS (Friday close at 8.57)
SWKS has been in a weekly up-trend since July 17th 2006 that started at $4.00. Recently, though, the stock hit an area up in the mid 9's that seems to be a brick wall of resistance. Since September of last year the stock has built what looks to be a head & shoulders formation that if broken, would be quite bearish. In addition, since December, SWKS has begun to give ground in a way that projects that a short to mid-term trend down is ready to begin.
The head & shoulders formation seems to be clearly defined with the left shoulder at 9.04 (8.78 on a daily closing basis), the massive head built over a period of 3 months at 9.46-9.55 and the right shoulder possibly at Thursday's high of 8.78 (8.57 on a daily closing basis). The left neckline at 6.72 and the right neckline at 7.02 (both on a daily closing basis at 7.33-7.40). The right shoulder has not yet been clearly determined and therefore it is possible that a bit more of a rally could occur this coming week. Nonetheless, there is very evident and strong resistance between 8.78-8.84 and if that level holds the stock down, it is probable that the entire bearish formation will be totally built before the end of this coming week.
Resistance is strong at 8.78-8.84 but on Friday the stock closed right at the 20-day MA at 8.57 and further upside, on a daily closing basis, will be difficult to achieve. Support is quite decent between 7.85-8.00 and major support down in the 7.00-7.40 level, both on an intra-day and daily closing basis. A break below 7.12, on a daily closing basis, will likely thrust the stock down to at least the 5.90-6.00 level where the next decent support is found. Major support down at 4.85-5.17.
In looking at the weekly chart of SWKS, the 7.10-7.40 level has been a major pivot point since 2004. The stock seems to be showing that a strong top has been built and a drop down to at least the $7 is very probable. A break of that support level will not only break the major support and pivot point but the head & shoulder formation and drops down to the $5 would be highly probable.
Sales of SWKS at Friday's closing price of 8.57 and up to 8.75 and using a stop loss at 8.94 and a minimum objective of 7.12 would offer a risk/reward ratio of almost 4-1. If the head & shoulders formation were to break and generate a move down to the $5 level, the risk/reward ratio would skyrocket to over 9-1. Probabilities of a drop down to the $7 area are about 75% and probabilities of a drop down to $5 are probably about 50%.
My rating on the trade is a 7.5 (on a scale of 1-10 with the strongest probability rating being 10).
GW (Friday closing price 6.37)
GW is a stock that has been in a strong downtrend since July of last year from a high of 8.60 down to a low made back in December at 4.85. This is a stock that had a major up-trend starting in 2001 at 1.71 that ended in Jan06 at with a high of 8.93. During the ensuing 18 months the stock traded in a sideways fashion between the mid 8's and the mid 6's until the breakdown of support occurred this past December.
Over the past 7 years, though, the $7 level seems to have not only been a major resistance level throughout, but even after that level was broken, it has continued to act as a major pivot point as well. The recent rally from the lows at 4.85 has already reached into the mid 6's and it looks evident that the stock is nearing levels of resistance that should be impossible to break at this time, without a major fundamental change.
Resistance on the weekly chart is very strong between 6.50-6.72 from two previous important highs and 9 previous important lows. On the daily closing chart resistance begins at 6.42 and extends up to 6.76. Some average support is found at 5.75 on the weekly chart and then slightly stronger at 4.74-5.08. Major support is not found until the low 3's. On a daily closing basis, support is minor at 5.88, 6.09 and 6.15. No strong support is found on the daily charts until 5.24.
Sales of GW at 6.50 with a stop loss at 6.90 and an objective of 4.85-5.20 will offer a risk/reward ratio of almost 4-1. Possibilities of a further break down to the 3.20 do exist and would raise the risk/reward ratio up to 8-1.
My rating on the trade is a 6.5 (on a scale of 1-10 with the strongest probability rating being 10).
VLO (Friday closing price 59.95)
VLO is a stock that is presently in an upward corrective phase of an 8-month weekly downtrend and reaching areas of strong resistance that are likely to prevent the stock from much further upside. It is also a stock that seems to be in the second wave of a three-wave move down and now reaching levels that present a good risk/reward opportunity.
VLO topped out last July at 78.68 from a rally that started back in Oct03 at $10. The subsequent drop in price has taken VLO back down to a strong support level of consequence in the $47-$48 level. That level of support is major and has been tested on 5 different occasions over the past 30 months. The repeated tests of support make the support area a magnet and a prime objective for the bears to break.
Resistance in VLO, on a daily closing basis, is very strong between $62 and $63 dollars, both from a major high at 63.05 and two major lows at 61.97 and 62.02. The latter resistance levels were tested this past week with rallies up to 61.82. In addition, the 50-day MA is currently at 61.82 as well. The stock has been trading below the 100-day MA and should a rally ensue that 100-week MA is currently right below the major resistance at 63.02 at 62.75. Resistance is seen as major. Support is minimal at 55.05, due to a previous intra-day low at that price, but in looking at the daily closing chart no support is found until the $48-$49 level is seen.
A failure to break above resistance, on this corrective rally, should generate an immediate drop back down to once again test the support below the $50 level. Such a drop would place the stock in risk of the major support levels between $47 and $49 breaking and generating a move down to into the mid to low $30's creating a home run scenario.
The key to the trade is the clearly defined resistance levels, a great risk/reward ratio, the existing weekly downtrend in only the second wave of a probable three wave move down, and the possibility of a home run being hit should the indexes resume their downtrend.
Sales of VLO between 60.50 and 61.50, placing a stop loss at 63.38 and having an minimum objective of 50.00 will offer at least a 4-1 risk/reward ratio. The trade does offer a good possibility that should the stock get back down to the $50 level it could generate a break of the support levels at 46.90 and 48.21 that would generate objectives down to the low $30's.
My rating on the trade is an 7 (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 moved up $4 in price (20%) this past week based on a positive earnings report but hit a strong resistance level as well as a previous gap area when it got up to 21.18. The gap area is between 21.18 and 21.85 and a closure of the gap would be a strong chart positive. Nonetheless, even with the help of a strong fundamental piece of news NTES was not able to even get into the gap last week. NTES did generate a new 3-month daily and weekly high close at 20.87 thus going above the previous one at 20.79. A close above a previous strong resistance level would normally be a strong buy signal but when it is only by 8 ticks it cannot be considered a true breakout yet. It is therefore necessary for the bulls to close the stock above the 20.79 level again on Monday to keep the upside strong. A close below 20.79 would give fuel to the bears to begin to push down for a closure of the gap left on the way up between 18.95 and 20.14. It also seems possible that the action in the indexes on Monday will reflect somewhat in this stock. CAT chart continues to look slightly tilted toward an upside breakout as the lows closes continue to inch upward and the resistance keeps getting tested almost daily. CAT has two intra-day highs at 72.17 and another one at 71.99 as well as two daily closes between 71.65 and 71.77. Nonetheless, even though the chart seems to show a slight inclination toward a breakout, the stock seems to be dependant on what the DOW does and therefore it is difficult to make a decision on the stock without looking at the indexes. It is evident, though, that the coming week will likely determine a strong direction for the stock. If the 72.17 level can be broken intra-day or a close above the 100-day MA at 71.90 be accomplished, it is probable that a buy signal of consequence will be given. In addition, the 20 and 50 day MA are presently crossing at 69.52 and that cross will likely signify some sort of movement of consequence as well. Daily closes next week below 69.52 or above 71.90 will likely give a strong signal of what direction the stock is next heading to. JNPR continues to look weak after another weekly close below 26.26. In addition, the stock closed below the 20-day MA all week. There is a double top up at 27.80 and a double bottom at 24.60. A break of either area will generate further movement in that direction. With the closing exactly at the halfway mark, it likely means the traders are undecided at this moment. This is a stock that will likely follow the indexes. CHINA was able to hold itself above the 3.64 daily closing low but did close below the weekly closing low of 3.81. Nonetheless, the close being within a few ticks on either direction is not conclusive enough to state the stock is going lower. More action is needed but the probabilities now lie toward the downside. KO did close below the lowest weekly close since October 8th but only by 15 ticks. The daily close needs to be below 57.40 to regenerate the downside momentum. Friday's low was 57.39, which means the stock is under pressure but not yet ready to confirm further downside. Getting above the 60.00 level, on a daily closing basis, is still needed by the bulls to generate a rally. Stock continues to lean heavily toward more downside. ITG was able to breakout this past week but got up to a very strong resistance level and gap area at 48.69 and stopped flat cold. The stock was able to stay above the breakout level at 47.01 and continues to look strong. Nonetheless, the resistance and gap area up at 48.69 is important and if unable to close the gap after the strong momentum seen this past week, it could falter and give a failure-to-follow-through signal. JNJ was able to break and close above the double top at 63.45 but has been unable, so far, to generate any follow-through action. On the other hand, it has not yet been able to give a failure-to-follow through signal to the downside, as a daily close below 62.69 would be necessary to accomplish that. The stock was trading below that level at 3:15pm and only because the DOW had the late afternoon rally, was JNJ able to prevent the signal from being given. The weekly chart is still bearish, as a close above 63.36 on Friday was not accomplished, leaving the weekly downtrend intact. The bearish inverted flag formation on the weekly chart remains intact and the probabilities are strong the downtrend will soon resume. SVNT continues to try to rally but has been unable to get a daily close above 21.20 which would generate additional buying. Nonetheless, the stock maintains itself above a strong up-trending 50-day MA and likely will decide a short-term direction this coming week as the trading ranges have shrunk to a bare minimum. A daily close above 21.20 or below 20.00 will likely generate strong follow through. TRLG has a bullish short-term flag formation in place that seems to have, as an objective, the 23.35 level. Nonetheless the stock this past week had a fair degree of volatility on both sides making the end result not a given. Strong resistance at 20.97 and then again at 20.78 are in place and strong support at 20.00, on a daily closing basis is also now in place. Most of the day on Friday the stock was trading below the 20.00 level and if the indexes had not rallied late in the day, it is probable the stock would have closed below the 20.00 level and given a failure-to-follow-through signal. Nonetheless, the stock did rally and kept the flag formation intact. A daily close above 20.97 will be give a strong buy signal and a close below 20.00 a bearish failure-to-follow through signal. AA was able to get above the 100-day MA and confirm a breakout of that line. Keep in mind, though, that MA's are not as important during sideways trends as price points. The stock did get up to a major resistance level up at the 37.41-37.85 level this past week but was not able to close above it and did sell off, back down to the 100-day MA at 36.55. Like with so many other stocks, this one also seems to be hanging on what the indexes. Either way the indexes go, though, the likelihood of AA getting back down to the 33.90 daily closing support level are very strong. The 20 and 50 day MA are also getting ready to cross. It is likely that a decision on the short-term trend will be made this coming week. RX has what looks like a bullish flag formation on the chart but is also abutting against a major resistance level up at 24.88-25.24 level that looks imposing, to say the least. The stock this past week tried to get above the 100-day MA on a couple of occasions but failed to close above it. In addition, the 20 and 50 day MA crossed 6 days ago and the cross has brought about selling rather than buying. The trading parameters seem to be clearly defined with 24.88-25.22 on the upside and 22.74 on the downside. A break of the support at 22.74 would likely get rid of the bullish flag formation and generate a break down to the $20 level. A break above 25.22 would likely be explosive and generate a rally up to the 28.00 area. Keep in mind that the stock has been in a sideways trend for 4 months now but is in a major downtrend on the weekly charts. The probabilities still lie on the side of continuation of the downtrend. SBUX see above, as a sell mention this week.
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1) KO - Shorted at 59.64. Stop loss at 60.10 stop close only. Stock closed on Friday at 58.26.
2) JNPR - Averaged short at 27.95 (4 mentions). Stop loss lowered to 27.89. Stock closed on Friday at 26.19.
3) CAT - Shorted again at 71.07. Now averaged at 69.395. Stop loss at 72.27. Stock closed on Friday at 71.18.
4) NTES - Averaged short at 20.225. Stop loss now at 21.28. Stock closed on Friday at 20.81.
5) CHINA - Purchased at 3.93. Stop loss at 3.56. Stock closed on Friday at 3.72.
6) AA - Shorted at 36.69. Stop loss at 38.07. Stock closed on Friday at 36.55.
7) SBUX - Shorted at 18.62 and then again at 17.98. Averaged short at 18.30. Stop loss at 19.35. Stock closed Friday at 18.25.
8) ITG - Averaged short at 45.97 (3 mentions). No stop loss at present. Stock closed on Friday at 48.25.
9) JNJ - Shorted at 63.70. Stop lowered to 63.98. Stock closed on Friday at 63.18.
10) PDCO - Shorted at 34.26. Covered short at 36.42. Loss on the trade of $216 per 100 shares plus commission.
11) TRLG - Shorted at 19.13. Stop loss at 21.10. Stock closed on Friday at 20.49.
12) RX - Shorted at 24.52. Stop loss at 25.62. Stock closed on Friday at 23.50.
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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