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Issue #62 
March 09, 2008 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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| Indexes have broken supports and under heavy pressure!
DOW Friday close at 11893
The DOW, this past week, was no longer able to hold itself up with "smoke and mirrors", as it had done for the past 5 weeks, and experienced a breakdown of support levels. The DOW on Friday closed at a 17-month daily and weekly closing lows and gave a signal to expect more of the same this coming week.
The Fed infusion of additional funds on Friday did not help the market stave off a sell-off after the unemployment numbers showed a marked increase, thus signaling that the economy is, in fact, in a recession. All previous support levels were broken and the indexes all closed near the lows of the day and the week.
On Friday, both the 12099 support level on a weekly closing basis, and the 11970 support level on a daily closing basis, were broken, leaving only the intra-day lows at 11635 and 11645, seen on Jan 23rd and 24th as the only support left in the chart. The closest resistance level is up at 12350 where the most recent high as well as the 20-day MA is found. Psychological resistance will also be found between 11970-12030. Below 11635, there is no evident support in the DOW until the 10700 level is reached, on an intra-day basis (10747 on a closing basis). There is minor as well as psychological support at the 11000 mark.
There is a strong probability that the DOW is heading down to the 11635 level in the early part of the week to test the support at that price. Whether that support level holds or not is a question that cannot be speculated on at this time but it is a question whose answer will reverberate strongly in the indexes. With the double top at 12767, it is possible that a successful retest of the support down at 11635 will set up a double top/double bottom scenario, using the intra-day chart. If that does happen, it may cause the index to get into a trading range scenario of 1100 points for the next few weeks and/or months.
Nonetheless, there are several problems with that scenario. Intra-day double bottoms or tops are nowhere near as strong as the ones that are built on daily or weekly closing prices. This means that the possibilities of the 11635 level holding up are at best 50-50. It is more likely that the break of support in the DOW this past week is the beginning of the third wave down of a strong downtrend, in effect since October of last year. If such is the case, it is likely the third wave down will be stronger than the previous two, and ultimately generate a move down near or to the 10,000 mark.
The first wave down was about 1500 points, the second wave down was a bit over 2100 points and the third wave down could be between 2700 and 3000 points down. Such a move would put the DOW near or just below the 10,000 mark. Whether this is the beginning of the third wave or not, is not something that will be known or aggressively speculated on, until the 11635 level is broken.
It is likely that without some major fundamental piece of news the 11635 level will be seen sometime this coming week. The biggest problem facing investors, though, is that major fundamental pieces of news (miracle cures) seem to be exhausted as the Fed seems to have already pulled most every possible rabbit out of the hat during the past few weeks. This past week, after the very bad unemployment numbers, talk was circulating that the Fed may lower interest rates as much as 100 points on March 18th. Such action is not likely to help the market at this time as it not only seems to be a panic move but one that is already been "factored" into the market. In addition, some Fed governors are already warning that inflation is likely to become a major problem very soon and lowering of interest rates to that degree will only exacerbate the problem.
One last factum of interest. The 200-week MA is currently around the 11500 level. The last time the DOW broke below the 200-week MA was back in September 2001 when it was trading at 10,000. The break of that MA generated an immediate (2 months) move down of close to 2000 points from 10,000 down to 8062. The situation with the indexes seems to be dire and could get much worse very fast. In my opinion, the train has already left the station and is starting to roll.
NASDAQ Friday Close at 2212
The NASDAQ actually gave several strong sell signals this past week, not the least of which was the breaking of the 200-week MA. The last time that MA broke it generated a move down of 250 points within just two weeks. The index did rally above the line thereafter, back in the December 2000, but when it broke it the second time, a few weeks later, the NASDAQ went down 910 points in less than 2 months.
The NASDAQ has been the leader of the indexes on the way down and that has a direct correlation with the entire economy and not just with certain industries, like the bankers, that may be causing much of the slide.
There is little support in the NASDAQ below 2250 but there is psychological support at 2200, and some minor support at 2173 and 2137. Stronger support is seen at 2073 and even stronger at 2043. Resistance is minor at 2273 and then likely much stronger at 2279.
The action seen in the NASDAQ this past week, and more importantly on Friday, seems to suggest that a drop down to the 2069-2073 is likely to be seen shortly (1-2 weeks). The 2173-2200 level is also likely to hold up for a day or two, but any close below 2173 will thrust the index down about 100 points soon thereafter.
One possible scenario, based on what happened back in 2000, is a drop over the next two weeks down to the 2000-2073 level, and then a rally back up over the 200-week MA to perhaps as high as 2345. This pattern would then be followed by a very strong collapse down to around the 1800 level or lower.
The NASDAQ is right now the one index that has already broken below the January lows and must be considered the leader to the downside.
S&Poors 500 Friday close at 1293
The SPX could be the bell-weather chart for the indexes this coming week. Often in the past, this index has shown clear chart formations that have forecast correctly index movements. In looking at the chart, it seems that this coming week, the SPX could be the narrator of "the story".
The SPX managed to close exactly on the 200-week MA line on Friday as well as offered a great re-test of the previous intra-day low made back in January at 1270, with a drop on Friday to 1282. Based on what happens in the first couple of days of trading, the SPX chart is now set up to clearly point out what is likely to happen in the coming months. With the possible successful retest of the lows as well as the closing right on the 200-week MA, it seems likely that if the index rallies up this week, the move down will be seen as the last gasp down prior to a strong rally. On the other side of the coin, a break of support at 1270 as well as a break of the 200-week MA, will signal that the next leg down in the downtrend has started.
Support in the SPX, on a daily closing basis, is found at 1272 (1270 intra-day), at 1257, and then much stronger at 1230-1236. Below 1230, there is little until 1180 is seen. Resistance should now be decent at the previous major low of 1311, and minor at 1334, both of these on a daily closing basis. on an intra-day basis.
The action this past week was quite bearish and the third leg of the downtrend might have now started. It is likely the action in the first couple of days of the week will define just how bad the break of support was, and how much more can be expected.
The signals given in the indexes are open to many different interpretations which means it is not likely that the stock market will take a huge fall on Monday or Tuesday, though some follow through to the downside is expected. Nonetheless, by Wednesday, the charts should clarify the extent of damage that can be expected from this past week's negative break and a better idea of how to approach this situation will be shown.
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Stock Analysis/Evaluation
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CHART Outlooks
Under the present circumstances it is impossible at this time to consider any purchase of stocks, even though levels where some stocks might be considered purchases seems to be nearing. It is particularly tough this coming week to find stocks to sell, as the risk/reward ratios on the short side have shrunk across the board. Here are a few that still have risk/reward ratios worthy of consideration.
There is one stock I am mentioning as a buy this week, as it has a very appealing risk/reward ratio and does not normally follow the index trends. Nontheless, with this one exception, everything else is a sell.
SNDA (Friday Close at 32.24)
SNDA is a stock than has been rallying while the indexes have weakened but the contrarian action is not something that happens as a rule. Just recently, from December 7 through January 17, the stock took a tumble from a high of 39.40 all the way down to 23.80 and broke through several well-established levels of support in doing so. The recent rally, back up to the 35.00 level, seems to have been fueled by short covering more than anything else. No re-test of support levels has been seen yet and therefore a drop back down is expected.
The chart does show the possibility of a large head & shoulders formation being built, but at this time it is too early to take that into consideration in this evaluation. Nonetheless, it's good to be aware of it as it could generate a home run scenario if the formation gets confirmed.
On a weekly closing basis, there are two levels of strong resistance at 33.30 and then again at 35.22. The 33.30 close is from July of last year. It is a very evident resistance as well as the left shoulder of the head and shoulders formation. Last week SNDA closed at 33.08 and not only was the 33.30 level tested successfully, as the stock closed lower this past week, but the 20-week MA at the same price was also tested. On a daily closing basis, there is good resistance at 33.59, as it is the most recent daily closing high but also where the 100-day MA is currently located. Above that level there is very strong resistance between 34.87 and 35.73 that seems unlikely to be broken any time soon.
Support of some consequence is found at 31.04, on a daily closing basis, and at 30.64 on an intra-day basis as well as. It is also where the 20-day MA is currently located. The $30 level will also act as a psychological support. Nonetheless, the strongest support level is found by going back to 2005, where the entire area from 27.80-29.00 showed itself to be strong.
There is a very high probability of a drop down to somewhere between 27.80 - 28.00 and that will be the main objective. Nonetheless, if that level of support does not hold up, drops as low as 25.31 would be probable as the recent low at 23.80 has not yet been tested in a strong fashion. One last thing, if by any chance SNDA breaks below the 23.80, the head & shoulders formation I mentioned would be broken, the objective would be 18.10 or lower.
Sales of SNDA between 33.48 and 33.60 and placing a stop loss at 34.41 and having an objective of 28.41 will offer a risk/reward ratio of over 5-1. If you want to increase your chances of not getting stopped out you could place your stop at 35.00 and your risk/reward ratio would drop down to just a bit over 3-1. Keep in mind that if the 27.80 level breaks drops down to the 25.00 level would likely occur and therefore the risk/reward ratio would increase.
My rating on the trade is a 6.5 (on a scale of 1-10 with the strongest probability rating being 10).
INTC (Friday close at 20.10)
INTC took a big tumble in December with the stock trading at 27.05 and by January 22 had seen the stock drop down to 18.05. The subsequent upward correction or short covering rally saw the stock reach a high of 21.82 but that has been the high point for the last 6 weeks. The chart patterns suggests that an inverted flag formation is in place and that a break of the 18.05 recent low, would generate a strong move down.
Since the recent upward correction reached the high of 21.82, INTC has been in a downtrend with each subsequent rally being lower than the previous one (21.28, 20.99, 20.90, and now possibly Friday's high at 20.39). The low at 18.05 has yet to be tested and with the indexes all making new 17-month lows, it seems likely that at the very least, the support level at 18.05 will be tested.
Strong resistance, on a daily closing basis, is now found at 20.77. Strong support is seen repeatedly (perhaps too repeatedly) between 19.82 and 20.00. Such repetition usually end up in the level getting taken out. Below that level, only the lowest daily closing low since August 2006 at 18.63 stands in the way.
It is important to note that for 18 months, the closing day support level in INTC at 19.00 had held up and the recent close at 18.63 was a break of that support. The break was not confirmed as the stock rallied up the very next week and gave a failure-to-follow-though signal that generated the rally back up to the 21.82 level. Nonetheless, the euphoria of the failure-to-follow-though is slowly being replaced with the negativity of the indexes breaking down.
It seems very likely that at the very minimum, the 18.68 level of daily closing support (18.05 intra-day) will be tested. Add the fact that the break of support did occur and that the indexes seem to be in a downtrend, it seems possible to anticipate that INTC could re-start its own downtrend and break the 18.68 level of support. Such action could result in a re-test of the 2006 low (major support) at 16.75. Ultimately it could also result in a re-test of the 10-year low at 13.90, as the break of the inverted flag formation would project a drop down to 13.77.
Sales of INTC between Friday's closing price of 20.07 and 20.22 and placing a stop loss at 20.95 and having an objective of 18.05 would offer a risk/reward ratio of 3-1. If INTC does not go above 20.39 on Monday, the stop loss would be able to be lowered to 20.49 on Tuesday, thus raising the risk/reward ratio to 5-1.
My rating on the trade is a 7 (on a scale of 1-10 with the strongest probability rating being 10).
OVTI (Friday closing price 16.83)
OVTI is a stock that on Feb 28th reported higher earnings than anticipated and generated an immediate and strong rally of $3.20 over a period of only a few days. Nonetheless, this is a stock that had previously been in a strong downtrend starting in October with a high of 25.17 that ended in January with a low of 11.50. The recent rally carried the stock up 35% from the lows but much of that rally was probably due to short-covering, rather than what the actual earnings report generated in price.
OVTI, on the rally, reached back up to the 200-day MA, as well as the 50, 100, and 200 week MA's but failed to get through or close above any of them. The lower closing on the daily chart gave a mini sell signal that could signal the stock is due for drop back down to re-test the support levels below.
Decent resistance is found between 16.96 and 17.73, as that level seems to have been an important pivot point on 7 different occasions over the past 8 months. In addition, with the 200-day MA currently at 17.77, the 50 and 200 week MA at 17.12, and the 100-week MA at 17.56, the entire area becomes a very strong resistance level. Under the current conditions in the stock market it seems evident all those resistances will be difficult to overcome. Support on a weekly closing basis is at 13.88 and the again at 14.38. On a daily closing basis there is minor support at 16.30 and then again at 15.39, but neither of those supports can be considered important.
Sales of OVTI between 16.99 and 17.05 and placing a stop loss at 17.74 and having an objective of 13.88, will offer a risk/reward ratio of 4-1.
My rating on the trade is a 6.5 (on a scale of 1-10 with the strongest probability rating being 10). The rating is low only because the stock has been in a recent up-trend and the sell signal has been minimal in nature. Nonetheless, with what is happening in the stock market, this could become a much higher probability trade if the indexes continue to break down next week.
ANGO (Friday closing price 9.99)
ANGO is a stock I have quite a bit of history with and it is a stock that has been hit hard over the past year with several fundamental items that have caused the stock great grief. Last year in August, the company lost a patent infringement law suit that caused the stock to drop from $30 down to $16 and just this past week the company announced lower earnings and was downgraded as well, causing another strong drop in price to occur. Nonetheless, the company has several popular and needed medical products that give the company over $170 million in income per year and still has quite a bit of overall strength fundamentally.
Nonetheless, the reason for the mention this week in ANGO is chart oriented and not fundamentally driven. In addition, having traded this company often in the past, and knowing that often the stock trades "against" what the indexes are doing, make this stock an attractive risk/reward ratio, unfortunately not with a high probability rating.
Major (and only) support in ANGO is down at 9.15 (8.90 intra-day). Resistance is strong at 12.90 and then again at 15.10-15.50.
The support down around the low 9's is back from October 2004 (a few months after the stock started trading). The stock traded below $10 for about 10 days and then started a rally that just 2 months later reached the $22 level. During the period from October 2005 to April 2006 the stock was one of the "darlings" of the medical community because of its Dialysis products. Nonetheless, the company was sued for Patent infringement and even though they were found guilty, it was said their involvement would only cost them about $9 million dollars in penalties, a small amount in the overall context of things. Nonetheless, the stock took it on the chin and dropped down to the mid 15's where it was able to rally back up to the $21 level thereafter where it stayed for quite a few months. That rally from 15.50 up to the $21 level was a big profit for me.
With the stock back down under the $10, the analysts downgrades only being a lowering of objectives from $18 down to $15, and the fact the stock does not normally move in conjunction with the stock indexes, makes this particular trade seem attractive.
Purchases of ANGO between 9.15-9.35 and placing a stop loss at 8.80 and having an objective of at least 12.90 and quite possibly as high as 15.10, offers a risk/reward ratio of at least 7-1, if not as high as 15-1.
My rating on the trade is a 5.5 (on a scale of 1-10 with the strongest probability rating being 10). The reason for the low rating is the negative momentum of the recent break and the negativity surrounding the stock and marketplace. Nonetheless, with the support level clearly defined, the risk small, and the profit potential attractive, makes this trade a must-do.
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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 was unable to give any clear indications of where the next $3 move is going to. The stock waffled all week, between the resistance at 18.78 and the support at 16.38, without giving the slightest clue of its direction. The chart is still slightly tilted toward a downside move and with the indexes under strong pressure, it is likely that the stock will be on the defensive, at least for the first part of the week. A daily close above 18.70 or below 16.49, should signal follow through on either direction of at least an additional $1.50.
VLO looked extremely weak all week and broke below the weekly closing support at 54.03. The next strong weekly support, on a weekly closing basis, is down at 49.36. That is the same level where the 200-week MA is currently situated. Nonetheless, the stock was able to close on Friday above the 52.12 daily closing support level made on January 22nd. This means that there is still some support in the stock left, before a retest of the 48.21 level (lowest daily closing price since Nov05) can be made. The chart does look pre-disposed for further short-term downside but if VLO does get below the $49 level, covering of shorts should be seriously considered. There is very little resistance to the upside except a bit around $54-$55. Keep a close eye on the indexes on Monday as well as Friday's intra-day low of 51.66. If that low is taken out, you can expect the stock to see the $50 level or perhaps even $49. A close in the green on Monday would be short-term positive. KO continues to trade in a very bearish weekly flag formation that, if broken (an intra-day print below 57.39), would likely generate an immediate move down toward the $53 level. The 60.45 level must be considered major resistance at this time but on a closing basis, the 59.68 level must now be looked up as strong resistance as well. Friday's action, though negative, did not generate any new signals in either direction. ITG broke down aggressively last week and gave all kinds of sell signals. The weekly close on Friday was below the previous breakout level at 44.75 and the stock continues to give failure-to-follow-through signals of great consequence. The stock did close on Friday at the 100-week MA but since intra-week moves don't mean anything, that cannot be considered a support level until next Friday. On a daily closing basis, the nearest possible support level is 43.10, as that is where the 200-day MA is currently located. Nonetheless, if that level does not hold up, there is no support whatsoever until the $39-$40 level is seen. Resistance will now be strong at 45.00 and very strong at 45.92. JNJ broke below its support at 61.88-62.03 and also broke out of an inverted flag formation that projects a move down to the $57 level. There is "minor" intra-day support at 61.35 and some again at 60.73. Major support is found at 59.77-59.87 intra-day and at 60.00 on a closing basis. The 60.00 level now has a very high probability of being reached but the support there must be considered very strong as well. In order to reach the downside objective of the flag at $57, the stock market will have to be tumbling pretty badly. Nonetheless, a break of 59.77, on a daily closing basis, will thrust the stock down to the 57.46 level. as there is no support of consequence in between. Partial profits should be considered if the stock reaches 60.00. Resistance will now be strong at 62.03. Possible trading range for Monday is 61.73-60.73. GW gave a mini sell signal when the stock closed below the weekly support at 6.09 and below the 20-day MA at 6.30. A drop down to the 5.88 level is now expected. The 20-week MA is currently at 5.66, the 100-day MA is at the same price, and there is a strong weekly support at 5.75, which will not be in play until next Friday. There is a decent support level as well at 5.88 where the 50-day MA is currently located as well as a previous daily low close of consequence. Overall, though, the stock certainly seems that it has turned the corner to the downside and drops down to my main objective at 5.20 are now very possible. AA had a very negative Friday close, with the exception the close was right on the 20-day MA. The weekly chart was able to begin turning down, which gives a minimum objective, on a weekly closing basis, of a move down to 35.19. On the daily chart, a break below the 20-day MA at 36.60, will likely take the stock down to test the daily closing support at 33.90. There is support on the daily chart at 35.00 but it is considered minor in nature. With the gap down opening on Friday, the stock is giving strong notice that things could get very negative very fast to the downside. A close below 33.90 will thrust the stock down to the $30, which was originally my main objective. It is likely, though, that in order to reach that level, the indexes will have be breaking. Resistance should now be very decent at 37.48. Overall, the chart is starting to look weak and if the stock goes below the low on Friday at 36.00, some strong selling is likely to occur. RX did not participate Friday in the break of the indexes. This was one of a few stocks that managed to close in the green. The action was somewhat disturbing as the stock did not even get down to the 21.28 level of support where you could say it brought in short-covering. On a daily closing basis, resistance is now at 22.47 and support at 21.66. Major support at 21.05-21.13. Based on the fact the stock was positive on a negative index day, makes this stock one to watch closely on Monday for possible news to be unveiled. SBUX continues to look weak and sick as new lows are made. The stock is into new 4-year lows and the chart shows only minimal support down between 15.00-16.00. At these prices and looking at the way the stock acted on the way up back in 2003-2004, it is likely the stock will continue to deteriorate, but in a slow and consistent pattern, much like it did on the way up. Strong support is not found until the 11.45 level is reached and that price continues to be the objective. Keep in mind the chart says that it could take as long as 10 months to reach that level. Nonetheless, at this time I see no reason to cover any of the short positions. Strong resistance will now be found at 18.44 and major at 19.33. CCJ gave a mini sell signal on Friday when the stock closed below the 38.55 daily closing support level. In addition, with the failure of the stock to close, on a weekly closing basis, above the 40.54 level and closing below last week's high weekly close at 39.25, the chart gave reasons to believe the correction upward has ended and the downtrend resuming. Either way, a re-test of the lows between $32.50 and $35 is highly likely to occur. The 20 and 50 day MA are currently crossing right at 35.90 and a close on Monday below that level will be a strong (not mini) sell signal. Support, on a daily closing basis, is strong between 35.25-35.35 and even if the MA's are broken, that level should pose problems for the stock to break. Should that level of support get broken, a drop down to 31.85 (32.58 on a weekly closing basis) will likely be seen. Using the weekly charts, a move down to $35 is very probable and a move down to the mid $32's also has good possibilities. During this next drop, it is likely that it will be determined whether the 9-month downtrend is resuming or whether the stock is building a bottom and a support base. A break below 32.58, on a weekly closing basis, will mean the downtrend has resumed and will generate a lot of selling and drops down to the mid $23 level. At this time, the chances of the downtrend continuing are about 60-40 but if the indexes do break, the probabilities will rise exponentially. This short trade seems will turn out profitable either way, but if the downtrend is resuming, it could turn into a home run.
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1) KO - Shorted at 60.01. Now averaged in at 59.825. Stop loss at 60.53. Stock closed on Friday at 58.85.
2) GPS - Shorted at 20.28. Covered at 20.89. Loss on the trade of $62 per 100 shares plus commissions.
3) CCJ - Shorted at 39.75. Stop loss at 40.27 stop close only. Stock closed on Friday at 37.06.
4) VLO - Shorted at 62.86. Stop loss now at 57.62. Stock closed on Friday at 52.51.
5) NUAN - Shorted at 17.10. Covered at 17.52. Loss on the trade of $42 per 100 shares plus commissions.
6) AA - Shorted at 38.93. Averaged short at 37.81. Stop loss now at 39.38. Stock closed on Friday at 36.60.
7) SBUX - Shorted at 17.69 (3rd mention). Averaged short at 18.10. Stop loss lowered to 18,54. Stock closed on Friday at 17.10.
8) ITG - Covered shorts at 44.83. Profit on the trade of $337.50 per 100 shares (3 mentions) plus commissions.
9) JNJ - Shorted at 61.62. Averaged short at 62.66. Stop loss now at 63.40. Stock closed on Friday at 61.51.
10) GW - Shorted at 6.43. Stop loss lowered to 6.60. Stock closed on Friday at 6.05.
11) TRLG - Covered short at 19.14. Loss on the trade of $1 per 100 shares plus commissions.
12) RX - Shorted at 24.52. Stop loss now at 23.41 stop close only. Stock closed on Friday at 22.02.
13) ITG - Shorted at 44.95. No stop loss at present. Stock closed on Friday at 44.00.
14) SVNT - Liquidated long position bought at 19.89 at 23.22. Profit on the trade of $333 per 100 shares minus commissions.
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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