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Issue #437 
July 26, 2015 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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| Market Flops as Earnings Disappoint
DOW Friday closing price - 17568
The DOW generated a negative reversal this past week, having gone above the previous week's high and then closing below the previous week's low. A new sell signal was given on the weekly closing chart on Friday, having closed convincingly below the 5-month weekly closing low at 17712 that was seen in March. The index closed on the lows of the week, suggesting further downside below last week's low at 17553 will be seen this week.
The DOW received disappointing earnings reports on several of its main stocks and that was the main fundamental reason the index experienced the selling pressure. Nonetheless, with the Fed now likely to raise interest rates in September (for the first time since 2007) and the next round of earnings reports not due out until October, the bulls are not likely to have much ammunition with which to stage a rally at this time, meaning that a correction of some consequence is now the most probable scenario.
The DOW closed below the 200-day MA, currently at 17755, and that is the fourth time that has happened in the last 32 months. Nonetheless, what makes this break significant is that the first 2 times it happened the index went on to new highs, while the last time the index failed to achieve a new high, suggesting that this current break has mid-term bearish implications.
To the upside and on an intra-week basis, the DOW now shows minor to perhaps decent resistance between the the 200-day MA, currently at 17555 and up to 17825 which was the high seen after the previous break of the line occurred. Further resistance, but unlikely to be seen anytime soon, is found at the 18000 demilitarized zone and up to 18103. To the downside, there is minor intra-week support at the recent 17465 low and then nothing until minor support is found again at 17243. Below that level, there is decent support at the double low at 17037/17069 level.
The probabilities are high that the DOW is now in a correction of some consequence and one that is likely to continue up to and slightly after the Fed September meeting.
The probabilities favor a trading range this coming week between 17243 and 17755 but when and if the retest of the 200-day MA fails to negate the break (likely), the index will probably head down to the 17000 level where a double low (17067/17037) is found. If the double low is seen again, it will become a multiple low and also likely to be broken, suggesting the next objective would be the minor support found at 16603. Nonetheless, if this correction is to mimic the 20% correction seen in 2011, the objective would be the 14700 level which would generate at least an intra-week break of the 200-week MA, currently at 15150, which is the same as what happened in 2001.
The outlook for the DOW is now decidedly negative, especially since the immediate future has few fundamental positives that could turn the tide around.
NASDAQ Friday closing price - 5088
The NASDAQ generated a negative reversal week, having made a new all-time intra-week high at 5231 and then closing in the red and on the lows of the week, suggesting further downside below last week's low at 5084 will be seen this week. The reversal is not very dependable since it has happened on 4 previous occasions this year and the index within a few weeks then proceeded to make a new high over the previous high each and every time it happened. Nonetheless, the now likely inflated high prices for AMZN, NFLX, and GOOG, as well as the chart factors in play at this time (gaps below) do suggest the index will get down to at least the 5000 level and if that level is broken on a weekly closing basis, a sell signal of consequence will be given.
The NASDAQ also generated a failure-to-follow through signal on both the daily and weekly closing charts, having closed on Friday below the previous all-time high daily close at 5160 and below the previous all-time high weekly close at 5117. With no earnings reports or economic news scheduled for this coming week that could fundamentally help the bulls negate the failure signals, the probabilities now favor a short-to-mid-term top having been made and a correction of consequence to follow.
The negative reversal seen in the NASDAQ has to be considered indicative, inasmuch as its 3 main stocks (NFLX, GOOG, and AMZN) all had much better than expected earnings reports and were all trading (as of Friday's close) at new all-time highs, meaning that the bulls are unlikely to find any new ammunition with which to rally the index from these levels.
To the upside, and on intra-week basis, the NASDAQ will show minor resistance at 5111, minor to decent at the previous all-time high at 5164, minor at Thursday's high at 5196 and decent at the all-time high at 5231. To the downside, intra-week support is minor at 5016 and minor to perhaps decent at 4974. Further minor support is found 4956 and decent at the previous spike low at 4902. Below that level, there is support at the 200-day MA, currently at 4855, which does include a previous intra-week low of some consequence at 4825. Below 4825 there is no support of consequence until the 4580-4600 level is reached.
Over the past 2 weeks and due to the much-better-than-expected earnings reports on NFLX and GOOG, the NASDAQ had generated 3 gaps on the way up (breakaway, runaway, and a third gap) but with Friday's action having closed 2 of the gaps (in spite of the also much better than expected earnings report on AMZN) the first gap down at 5016 (originally considered a breakaway gap) is now a chart target/magnet for the traders, meaning that the index will likely be testing the important and pivotal support at the 5000 level this coming week.
It should be mentioned that a weekly close in the NASDAQ below 5000 would not only be a chart negative but a psychological one as well as the 5000 level has to be considered a pivotal area to the bulls if they want to continue to make new all-time highs over the short-to-mid-term.
Having failed on Friday in spite of its main stocks trading in new all-time highs, does suggest that a mid-term top has been found and that a correction is likely to occur. Probabilities favor the bears.
SPX Friday closing price - 2079
The SPX generated a negative reversal week, having gone above the previous week's high but then closing below the previous weeks low. The negative reversal is even more indicative since the red weekly close has generated a perfect double top on the weekly closing chart at 2126 as well as a double top on the intra-week chart at 2135/2132.
The SPX closed on the lows of the week and further downside below last week's low at 2077 is likely to be seen this week. With almost all the important financial earnings report out, the bulls now find themselves with little ammunition with which to generate a new rally, especially with the chart picture now strongly favoring the bear side.
To the upside, the SPX shows minor intra-week resistance at 2093, minor to decent between 2111 and 2113, decent at 2119/2120 and strong between 2132 and 2135. To the downside, support is minor to decent between 2167 and 2172, which does include the 200-day MA, currently at 2065. Further intra-week support is found between 2039 and 2044 and then nothing until the 1970-2000 level is reached.
The SPX is the index with the clearest chart picture, inasmuch as resistance is now strong and highly visible at the 2132/2135 level and support is equally visible and important at 2039/2044. Nonetheless, it should be mentioned that the support found between 2067 and 2072, which does include the 200-day MA, currently at 2065, seems to be pivotal for the index, meaning that a confirmed break of the MA line should give the bears enough ammunition to attempt the break of the lower support. Such a scenario suggests that the traders will be keying on what happens between 2067 and 2072 for their decisions on what direction is to come. It should also be mentioned that a break of the support at 2039/2044 would give a sell signal of consequence that would be difficult to negate without some tangibly positive fundamental news.
The failure to make new highs this past week in spite of having been as close as 3 points from the previous all-time high seen in May as well as most of its financial earnings reports coming in better than expected, does strongly suggest the tide has turned in favor of the bears.
The first 3 weeks of the earnings quarter are now over and even though some of the big stocks reported much better than expected earnings, the overall earnings picture disappointed. With no catalytic earnings reports left, the "slow" summer months ahead, and the traders facing the high likelihood of an interest rate hike in September, the probabilities no longer favor the bulls, at least not until October when the seasonal tendency is to rally.
The traders are now likely to focus on the charts for the next couple of months and with no big correction having being seen in the last 34 months, the probabilities now favor a larger correction, perhaps as much as the one seen in 2011 when the indexes corrected 20% from their highs.
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Stock Analysis/Evaluation
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CHART Outlooks
The fall in the indexes on Friday, in spite of the strong rally in AMZN, strongly suggests that the bulls will have a very tough time generating any new buying interest going into the slow summer months. In addition, there have been no negative economic reports that would suggest the Fed will not raise interest rates in September, meaning that traders are facing a period of time (2+ months) where the upside is not likely to offer any profits and with the overall market being overbought (especially the tech sector) it is highly likely that a correction of consequence will be seen.
By the same token, many stocks are oversold and down at prices that are considered oversold already, meaning that shorting can only be done with stocks that still have some "give" to them.
All mentions this week are shorts but they are stocks that are at high prices and still considered overbought.
HD Friday Closing Price - 113.60
HD made a new all-time high in March 2013, above the previous high at 70.00 that had been in place since the year 2000 (13 years). The stock then proceeded to go up an additional 70% in value, having reached a high in 117.99 in March of this year. It does need to be mentioned that the stock has not had a strong correction during the past 2 years, other than trade sideways between $72 and $83 for a period of 3 months between May and August of 2013. As such, it can be said the stock is a prime candidate for a correction of consequence if the indexes do the same.
HD is showing a double top on the intra-week chart at 117.92/117.99 and 2 successful retests of that high with a rally up to 116.48 in May and a rally up to 116.15 2 weeks ago. The retests are clearly evident on all charts (daily, weekly and monthly), meaning that all the necessary requirements for a top have been met.
To the upside, HD shows intra-week resistance at 116.15, at 116.48 and at 117.99. Nonetheless, if the signals given on Friday by the indexes are to be believed, a stop loss can be placed at 116.35 that is likely to hold up.
To the downside, HD shows minor intra-week support at 110.17, a tiny bit stronger at 109.53 and decent at 106.62, which does include the 200-day MA, currently at 107.30. Below 106.62 there is minor but slightly strengthened by the psychological nature of it, at $100. Further minor support is found at 96.99 and then nothing until the 86.25-88.33 level is reached. Based on the thought that this is a major correction, the latter support levels will be considered the objectives of the trade.
Picking the entry point for a short sale on HD is a bit tricky since the stock could easily get up to 115.08 without upsetting the negative outlook. By the same token, if the indexes start the week with weakness and no rally of consequence is seen, it is unlikely the stock will rally past the 200 10-minute MA, currently at 114.10.
Sales of HD between 114.05 and 115.00 and using a stop loss at 116.35 and having an objective of at least 100.00 (but possibly $86-$88) will offer at least a 6-1 risk/reward ratio.
My rating on the trade is a 4 (on a scale of 1-5 with 5 being the highest).
KMX Friday Closing Price - 63.18
KMX started its uptrend in November 2008 from a low of 5.75 to the all-time seen in March at 75.40. During this rally the stock has seen 3 corrections of some consequence occur, with the first one being 30%, the second being 39% and the third being 20%. The stock seems to be in a correction phase right now and based on the close on Friday, the stock has already corrected 17% from its 75.40 high. Nonetheless, the stock is near a pivotal support level that if broken will likely generate additional strong selling and based on the first 2 corrections of 30% and 39%, if that level of support gets broken, the stock is likely to mimic one of those drops and offer a nice profit.
KMX has already successfully tested the all-time high at 75.40 twice with a rally up to 73.76 in June and with the high seen 2 weeks ago at 68.99. The rally up to 68.99 was indicative, inasmuch as the stock was showing a previous resistance level at 68.71 that held up, meaning the weakness seen this past week is valid.
To the upside, KMX shows intra-week resistance at 68.99, at 73.76 and at the all-time high at 75.40. Like with HD, the stock has already fulfilled all of its requirements for a top through the daily, weekly, and monthly chart, meaning that the probabilities are high that the stock will generate further downside of some consequence, if and when the indexes head lower as well.
To the downside, KMX shows pivotal short-term intra-week support at 60.83. Nonetheless, below that level there is no previous support built until the 45.90 level, which does include the 200-week MA. As such, that line and that support will be the target of the short trade.
KMX closed on the lows of the week and further downside below last week's low at 63.08 is likely to be seen. Nonetheless, the stock spiked down last week from 68.80 to 63.08, meaning that some retracement of that spike might be seen first before new selling comes in. Such a retracement can be used to enter a short position where the risk/reward ratio is good enough to consider the trade.
The 200-day MA is currently at 64.60 and the previous intra-week low that got broken, which generated the spike down, is at 65.44, meaning that a rally up to one of those 2 levels might be seen before the selling interest resumes.
Sales of KMX between 64.55 and 65.44 and using a stop loss at 69.35 and having a 45.90 objective offers a 3.8-1 risk/reward ratio.
My rating on the trade is a 3 (on a scale of 1-5 with 5 being the highest). The rating would be higher if a good stop loss could be found that increased the reward but lessened the risk. In addition, the rating would also be higher if the 60.83 support level had already been broken.
PRAA Friday Closing Price - 62.11
PRAA is a short trade that I covered last week (in profit) but that was before the market showed weakness on Friday, suggesting the short trade should be re-instituted this week.
PRAA made a new all-time high weekly close 2 weeks ago, having closed at 63.62, above the previous high weekly close at 63.25. Nonetheless, the intra-week high made at 64.82 failed to take out the all-time high at 65.00, meaning that the bulls were unable to make the statement they needed to make in order to stimulate new buying interest. Now, with the indexes showing strong reasons to believe they are now in a correction and the stock having generated last week a drop below the previous week's low, as well as ending with a red close below the previous all-time weekly closing high, it does suggest that a major top/retest-of-the-top has occurred.
To the upside, PRAA shows intra-week resistance at 63.96, at 64.82 and major at 65.00.
To the downside, PRAA is showing minor support at 61.92 and then minor to perhaps decent as well as pivotal at 61.29. Below 61.29 there is no support of consequence until the 56.35/56.60 level is reached, that does include the 200-day MA, currently at 57.30. Further minor to perhaps decent support is found at the 52.01/52.92 level, at the $50 demilitarized zone, with 47.62 being a decent support and then nothing until the 200-week MA, currently at 45.00 is reached.
Under the kind of trading seen the past 7 months, the 56.35-57.30 level in the PRAA chart would be considered the objective but if the indexes are in a major correction, the stock is also likely to target the 200-week MA, currently at 45.25.
Finding the right entry point into a short PRAA trade is tricky, inasmuch as the recent high at 64.82 has not yet been tested successfully and a rally up to 64.25 can still occur without changing the outlook. By the same token, the stock broke below the 200 60-minute MA on Friday, currently at 62.60, and unless the indexes can generate a bit of a rally on Monday, it is unlikely that the line there will be broken. As such, the desired entry point will be a wide one. Fortunately though, the stop loss and the now possible downside objective still offer a very good risk/reward ratio.
Sales of PRAA between 62.55 and 64.24 and using a stop loss at 65.35 and having a 45.00 objective will offer a 6-1 risk/reward ratio.
My rating on the trade is a 3.5 (on a scale of 1-5 with 5 being the highest).
PGR Friday Closing Price - 30.51
PGR is a stock I gave as a sell mention in December of 2013 and that I shorted at 27.71 and covered the shorts 6 weeks later at 24.95 for a profit of $276 per 100 shares minus commissions. The sell mention then was based on an article I read that stated that the "long-term" prospects for the company were not good as driverless cars (soon to be a reality) would strongly hurt the company due to its dependency on insurance for drivers.
PGR did get on an uptrend in July of last year and for the past year the bulls were able to rally the stock from 23.20 to the high seen last week at 31.42. Nonetheless, the stock generated a negative reversal last week, having made the new all-time high but then reversing to close in the red and near the lows of the week, suggesting further downside below last week's low at 30.38 will be seen this week. What has made the reversal all the more indicative is that the stock was only able to get above the previous high seen 10 years ago at 31.22 by only 20 points and the negative reversal has generated a double top on the weekly closing chart (30.92/31.28) and will do the same on the intra-week chart if the stock goes below last week's low this week.
What makes this short trade all that more interesting is that the long-term fundamental prospects for the company are not rosy (due to the driverless car creation) and if the indexes are heading lower it will give the bears added fundamental reasons to short the stock.
To the upside, PGR shows strong resistance at 31.22/31.42. To the downside, very minor intra-week support is found at 30.38 and then nothing established until the 28.00 level is reached. Further support is found at 27.77 and then likely pivotal support 26.88 that includes the 200-day MA, currently at 27.05. Below that level, support is found at 25.23 and at 23.99 which includes the 200-week MA, currently at 24.05.
PGR has not yet tested the recent all-time high on any of the charts (not even the intra-day ones), suggesting that the stock is likely to rally at some point this week even if the indexes are heading lower. The weekly chart cannot be considered for determining an entry point as the reversal just occurred this week but the daily chart does suggest that a rally back up to somewhere between 30.73 and 31.00 will occur. As such, that will be the desired entry point.
Trading PGR is considered a conservative trade inasmuch as the stock usually does not move more than 20% in either direction (no matter the news) and does it slowly (usually months, not weeks). Nonetheless, the risk/reward ratio is good and the probability rating is slightly better than decent, meaning that this stock and this trade seems like a must-do, at least as far as the chart is concerned.
Sales of PGR between 30.69 and 31.00 and using a stop loss at 31.52 and having an objective of 24.00 will offer an 8-1 risk/reward ratio.
My rating on the trade is a 3.25 (on a scale of 1-5 with 5 being the highest).
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Updates
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| Updates on Held Stocks |
Closed Trades, Open Positions and Stop Loss Changes |
| AREX made a new 6+ year intra-week low and weekly closing low, having broken the intra-week low seen last December at 4.28 with an intra-week drop to 4.15 as well as breaking the all-time low weekly close at 4.64 with a close at 4.55. Nonetheless, the stock rallied 58 points from the low and generated 2 green daily closes in a row in the process, suggesting that there is buying interest at this level. Though the stock did make a new all-time weekly closing low it was only by 9 points (4.55 vs 4.64), meaning that if the bulls are able to generate a green weekly close next Friday, especially if above 4.64, it will be seen as a major double bottom on the all-time chart. Such a scenario would have strong bullish implications for the longer term. ARNA generated a small failure to follow through signal on Friday, having broken below the 4.18 level that was considered intra-week support just prior to the rally to 5.12. The stock closed on the lows of the week and further downside below last week's low of 4.05 is expected to be seen this week. The stock is now facing a pivotal week, inasmuch as a break below the 7-month intra-week low at 3.85 (3.92 on a weekly closing basis) would weaken the chart considerably and open the door for the downtrend to resume (versus the sideways trend that has been in place for the past 7 months) with at least a drop down to the next support level at 3.20 and offer decent possibilities of that level getting broken and 2.70 being seen. To the upside, the bulls need to rally the stock above 4.55 for any new buying interest to be seen. ENG convincingly broke the intra-week support at 1.25 (1.31 on a weekly closing basis) and fell down to 1.15. The stock is now showing 7 red close weeks in a row and 9 out of the last 12, meaning that fundamentally there is no interest in buying either. The stock closed on the lows of the week and further downside below last week's low is expected to be seen. There is no support of consequence below until the .92 level (.95 on a weekly closing basis) is reached. Short-term pivotal resistance is now found at 1.42. Probabilities strongly favor the bears. FCEL generated a new 45-month intra-week low, below the low seen 2 years ago at .84, and now the all-time low at .80 is in the crosshairs. The stock closed on the lows of the week and further downside below last week's low at .82 is expected to be seen. The all-time low at .80 was seen in October 2011 and if that level is broken there is no telling how low the stock could go to. Resistance is at .94 and is now considered decent. Probabilities favor the bears. FSLR generated another red close but this one seems to be indicative, inasmuch as the 200-week MA, currently at 44.35, was broken convincingly (contrary to the closes the previous 2 weeks). The stock closed on the lows of the week and further downside below last week's low at 42.25 is expected to be ween. Support on a weekly closing basis is found at 42.12 (minor) and at 40.72 (decent to strong and likely indicative). On a small positive note, the stock generated a green daily close on Thursday and Friday, in spite of the strong weakness in the index market, suggesting that some buying interest is being seen at these prices. In addition, if the bulls are able to get above Thursday's high at 43.64 any day this week, the buying interest is likely to pick up and a rally to the $46-$47 level seen. To the downside, last week's low at 42.25 is minor support and below that the 41.15 level is minor but likely short-term indicative support. Probabilities slightly favor the bears but not as strongly as is seen in the indexes. SINA generated another red weekly close, the 6th in a row, but the bulls were still able to keep the stock above the pivotal intra-week support at 40.44, which does include the 200-day MA, currently at 40.50. The stock did close in the lower half of the week's trading range and further downside below last week's low at 41.32 is likely to be seen this week. Minor resistance is found at 43.70 and strong and likely short-term pivotal at 45.04. The inability of the bulls to generate at least a retest of the gap between 50.60 and 51.55 is bearish and the chart formation that is being built has the look of a bearish Head & Shoulders that if the neckline at 40.44 is broken would offer a downside objective of $24. As such, any break below 40.44 should be considered critical and the long positions liquidated at a loss. Nonetheless, in looking at the chart, it does suggest that the stock might end up having a small rally week with 44.98 as the upside objective. VHC failed to follow through to the upside after the close the previous week near the highs of the week, to close out the week in the red and in the lower half of the week's trading range, suggesting further downside below last week's low at 4.08 is likely to be seen. Pivotal support is found at 4.08 that if broken would suggest the 3.80 level would be tested and if broken, the downtrend would resume. Probabilities are about even as the chart shows potential for either side to win the short-term battle. Nonetheless, if the indexes do head strongly lower (probable), it doesn't seem likely for the bulls to win the battle here.
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1) FCEL - Averaged long at 2.227 (4 mentions). No stop loss at present. Stock closed on Friday at .84.
2) ENG - Averaged long at 1.92 (3 mentions). No stop loss at present. Stock closed on Friday at 1.17.
3) FSLR - Averaged long at 59.404 (4 mentions). No stop loss at present. Stock closed on Friday at 42.97.
4) AREX - Purchased at 4.37. Averaged long at 5.89 (5 mentions). No stop loss at present. Stock closed on Friday at 4.55.
5) ARNA - Averaged long at 4.30 (3 mentions). No stop loss at present. Stock closed on Friday at 4.05.
6) TOL - Covered shorts at 37.69. Averaged short at 37.45. Loss on the trade of $48 per 100 shares (2 mentions) plus commissions.
7) SINA - Purchased at 42.53. Averaged long at 43.46 (4 mentions. Stop loss is presently at 40.35. Stock closed on Friday at 42.51.
8) XOM - Covered shorts at 82.20. Averaged short at 85.933. Profit on the trade of $1121 per 100 shares (2 mentions) minus commissions.
9) PRAA - Covered shorts at 62.13. Shorted at 63.87. Profit on the trade of $174 per 100 shares minus commissions.
10) VHC - Purchased at 4.17. Stop loss is at 3.65. Stock closed on Friday at 4.42.
11) AREX - Purchased at 4.49. Liquidated at 4.18. Loss on the trade of $41 per 100 shares plus commissions.
12) OSK - Purchased at 39.92. Liquidated at 38.12. Loss on the trade of $180 per 100 shares minus commissions.
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Encyclopedia of Chart Patterns. A must have for chart aficionados! |
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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