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Issue #63 
March 16, 2008 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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| DOWn and out?
DOW Friday close at 11951
After a week straight out of the mind of a comic book writer and a trading range of 563 points, the DOW ended the week with only a change of 58 points over last week's close. The emotional output throughout the week, though, was totally off the scale and I would not be surprised to see a run on Xanax this weekend at the local drugstores.
The DOW got hit with both major positive and negative news this past week. The positive news was the infusion from the Fed of $200 billion into the banking industry with an unheard of time frame for the banks to pay back loans of 28 days. That news generated a rally from the 11740 low up to the high of 12303. After a negative retail sales report failed to push the indexes down below support levels, and the CPI report came out slightly less bearish than anticipated, the market was ready to generate further movement upward. Nonetheless, the announcement by Bear Sterns of their liquidity problems and failure to meet their financial obligations hit the news wire and the stock market took that news on the chin and began to fall strongly. Only the last minute Fed involvement as well as promised help of Bear Sterns by JP Morgan stopped what could have been a collapse in the indexes.
Nonetheless, fear that there may be other financial firms in the same kind of trouble as Bear Sterns has now grabbed the public's attention and the mood of the market changed suddenly from one of hope to one of doom. The volatility in the last hour of trading on Friday was like a neon lighted yo-yo that signaled not only a mood change, but a general feeling that the economy in how headed toward a recession or depression. This feeling began permeating the marketplace strongly on Friday and unless Bernake can pull out another rabbit out of his hat at the FOMC meeting this week, is likely to cause the downtrend to resume with a fury.
The close on Friday at 11951 was below an important support level the bulls wanted to protect at 11970, but only by a few points so it cannot be said the support got decidedly broken. The DOW did manage to keep itself above last week's weekly close at 11894 and prevent a new sell signal from being given and stating the downtrend was continuing. Nonetheless, the close itself simply left many chart questions unanswered and awaiting further news on Bear Sterns as well as news of what the Fed will decide to do at next week's FOMC meeting on Tuesday.
Support on the DOW is found at the intra-week low of 11732 (11740 on a daily closing basis) as well as the intra-week low seen 6 weeks ago at 11635. Resistance will now be decent at 12146-12157, on a daily closing basis, and at 12303 on an intra-day basis. Strong resistance is found at 12397-12427, from the 50-day MA as well as a clearly defined previous high close.
The failure-to-follow-through on this week's rally and inability to close above 12099 on Friday (previous weekly closing support), has left the chart strongly tilted toward continuation to the downside. It seems that the traders are all waiting for the Fed to pull another rabbit-out-of-the-hat trick on Tuesday to help the market out. Nonetheless, the rabbits now seem to be costing more and more and are scarcer, and therefore the mood of the market is turning strongly toward a recession or depression status.
Many analysts are now expecting a Fed rate cut of 100 points to be seen this week. By the same token, many analysts have also stated that such a rate cut will be very damaging to the US recovery, both as far as inflation is concerned as well as world confidence in the dollar. More and more it seems that the Fed is between a rock and a hard place and that no matter what it does now, the economy is doomed.
After the Fed announcement this coming week, the chart will give a clearly defined signal of what to expect thereafter. Patience at this time is all that is needed.
NASDAQ Friday Close at 2212
The NASDAQ tried every which way this past week to negate the break of the 200-week MA at 2255, but when the dust cleared the index was still trading below the line. Though the daily close at 2212 was above last week's low daily close of 2169, it was the same close as last week's weekly close. Such action certainly does not give any ammunition to the bulls that the trend may be turning, and keeps the bears in firm control.
Since the gap down from 2324 to 2311 and break of the 20-day MA, on the same day (February 28th), the index has been unable to get above the MA or close the gap, though it has now tried on three different occasions in the past 2 weeks. Keep in mind that this last gap between 2324-2311 has the earmarks of being a runaway gap following, what could be called a breakaway gap at 2598-2571. If this recent gap is not closed and the NASDAQ resumes its strong and steep decline, this gap formation could signal a drop down to the 2000 area shortly.
In addition, Friday turned out to be a reversal day with higher highs and lower lows and a close in the red. Such a reversal, after testing the 20-day MA, should cause further down movement on Monday. Should the last recent support at 2169 be broken, on a daily closing basis, a strong and swift decline will likely occur.
Resistance is now strong at Friday's high of 2277 (2264-2273 on a daily closing basis). Major resistance is up at 2354 on a daily closing basis. Support is minor at 2200 and stronger at 2169 (intra-day and on a daily closing basis). Support gets a bit stronger at 2091 and then major down at 2020-2039.
In looking at the weekly chart, it is evident a steep decline in the index is still in process. There has been no correction, or even the whisper of a strong correction-to-come, during this recent downtrend, which started 6 weeks ago at 2413.
Barring any other "miracles" from the Fed this coming week at the FOMC meeting, the likelihood of continuation of the downtrend is quite high.
S&Poors 500 Friday close at 1288
The SPX set itself up with a possible intra-day double bottom this past week with a drop down to 1273 on Monday (previous low of 1270 on Jan 23rd). Such a double bottom should have generated a lasting rally but by the end of the week the index saw itself on the verge of breaking down instead of pushing up. In addition, Friday's close not only was a new 19-month weekly low close but the first time the index has closed below the 200-week MA since Feb01. On that occasion, the break of the 200-week MA generated a move down of 80 points in a matter of two weeks and 95 points over a period of 3 weeks.
For the last year, the SPX chart has been one to watch for clues as to what the indexes were planning to do. With the action this past week, it seems that fact is still in effect. The SPX broke the 200-week MA, closed in a new 19-month weekly low (whereas the other indexes did not), tested successfully the resistance level and 20-day MA up at 1327, and failed to generate the kind of rally a double bottom should have generated. These actions are all leading indicators telling us to expect lower prices for the next two weeks.
Strong resistance in the SPX is found up at 1327 and now also some minor resistance at 1301 from the broken 200-week MA. Support is decent at 1245 and then strong at 1232-1236, on both a daily and weekly closing basis.
Continuing to watch the SPX as the leader in the charts seems to be the way to go. The action on Monday could be indicative of what the reaction will be to the Fed after the FOMC meeting. It is not likely that there will be any strong moves in either direction until Wednesday but, chart-wise, the SPX might be giving us a clue as to what to expect with the action it takes on Monday and Tuesday.
On Monday its probable there will be further news on the BSC fiasco and if it's not worse, it's likely the indexes may calm down a bit awaiting the news on the FOMC meeting on Wednesday. The volatility of Friday is not likely to be repeated unless BSC has failed to come up with a survival package over the weekend.
With the fact that even Citibank stated they are expecting the Fed to cut interest rates 100 points, it is possible that even if that happens, it won't offer much help to the indexes. It is therefore probable that after the meeting the indexes will resume the steep downtrend they have been in for the last 5 weeks.
The talk on Friday by many economists, was that a Recession and/or Depression is upon us and that it will be deeper and longer than the one in 2001. I do not see the Fed being in a position at this time to solve that issue and therefore it is now becoming a high probability that most stock prices must come down some more. There is no doubt in my mind that after Wednesday, the market will resolve its mind and give us clearly defined answers to the questions everyone has been asking for the last 7 weeks. I do believe the "miracle" solutions that Bernake has been coming up with, have been exhausted and its up to the investors to decide, after the FOMC meeting, whether they are sufficient to stave of a recession or not.
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Stock Analysis/Evaluation
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CHART Outlooks
Under the present circumstances it is almost impossible at this time to consider any purchase of stocks, even though levels where some stocks might be considered purchases seems to be nearing.
There is one stock I am re-mentioning as a buy this week, but it is a stock that has a very attractive risk/reward ratio and not a stock that follows the stock indexes very much.
HON (Friday Close at 56.13)
HON is a stock than has been trading for the past 10 months in a clearly defined trading range between $62 and $52. It is a stock that has not been hit yet with the weakness existing in the stock market but is beginning to show signs of deterioration in the charts since January.
After having made a high in December 31st 2007 at 62.00, HON proceeded to drop and make a new 11-month low three weeks later on January 22nd at 52.05, breaking below the previous 9-month low at 52.88 and showing strong weakness. Two days later HON reported earnings increase of 10% and earnings increase per share of 25% and the stock proceeded to rally aggressively up to a high of 60.76 on February 4th. Since the high at 60.76 was made, each subsequent rally (3 of them) has fallen short of the previous high and now the stock seems to be getting ready to go back down to test the support between $52 and $53 dollars. With the weakness and potential strong downtrend in the indexes resuming, it is possible that HON may be back trying to fulfill the break of support it had started on January 22nd.
Resistance in HON, on a daily closing basis. is strong at 56.98 and major at 59.02. Support is decent at 55.50-55.68, strong at 53.95-54.12, and major at 53.19, all on a daily closing basis as well.
It is important to note that HON broke and closed below the 50-week MA on Friday for the first time since July 2006. Though the sell signal was not confirmed, with a close below the most recent previous low close at 56.04, it does look like the stock is likely to break further should the indexes continue to show weakness.
If nothing else, HON offers a shorting opportunity in a stock that is still considered to be at its peak in value of the last 8 years. In addition, the stock seems to be in a deterioration phase in price due to the problems in the US economy as well as general problems with world stock markets. It is a stock where the risk factor seems to be small and clearly defined.
A break of support at the $53 level projects a drop down to 49.70 where the 100-week MA is currently located. It is also interesting to note that there is a gap that was left unclosed on the way up, between 49.55 and 50.10. That gap will definitely become a magnet as soon as the stock closes below 53.19.
Sales of HON between 56.55 and 56.65 and placing a stop loss at 57.10 on a stop close only basis and having an objective of $50 will offer a risk/reward ratio of a minimum of 5-1. I am using a stop close only basis because of the uncertainty of how the market will react, intra-day, to the FOMC meeting results. If an intra-day stop loss is desired place it at 57.90 but do it on a "mental" basis.
My rating on the trade is a 7.5 (on a scale of 1-10 with the strongest probability rating being 10).
BRCD (Friday close at 7.17)
BRCD is a stock that 30 months ago hit rock bottom with a low of 3.44 made on October 10th 2005. The stock then began a rally that culminated 18 months later at a high of 10.58. Since that date the stock has been in a well-defined downtrend with two successful re-test of the high. After the latest rally up to the 8.17 level BRCD seems to be starting the third wave down of the downtrend.
The latest rally up to the 8.17 level was a successful re-test of the 100-week MA the stock had broken back in November. The chart pattern seen in this stock is a classic three-wave move and this next drop in price should take the stock down to re-test one of the two major weekly support levels at either $5 or $4.
Resistance, on a daily closing basis, is major at the 8.17 level but on the daily chart resistance is now strong at 7.55 (7,62 intra-day) and again at 7.36 (7.41 intra-day). Support is decent, on a daily closing basis, at 6.90-7.04 and then major at 6.16-6.19. Intra-day support can be found as low as 5.67. Should the daily closing support at 6.16-6.19 be broken, there is no support of consequence until the 5.50 level and then again major at 5.01. The strongest support, seen back in the first quarter of 2006, is down at the $4 level.
Taking into consideration the state of the economy, the weak stock market, and the chart formation showing the third wave of the downtrend starting in BRCD, it seems logical to think the stock will get down to at least the $5 level and quite possibly as low as $4. The lower figure would likely depend on how bad thing really are.
Sales of BRCD at 7.35 and placing a stop loss at 7.72 and having an objective of 5.01 would offer a risk/reward ratio of 6-1. Even with a drop down only to the closest support level down at 6.16-6.19, the risk/reward ratio would still be almost 4-1. A drop down to the $4 level would increase the risk/reward ratio to close to 10-1 and the possibilities of such a drop are at least 40%
My rating on the trade is a 7.5 (on a scale of 1-10 with the strongest probability rating being 10).
CSCO (Friday closing price 24.32)
CSCO has been on a very strong downtrend since November of last year when it reached a 7-year high at 34.24. The downtrend has been steep and significant and in January CSCO broke below a major support level at 25.30 that had stood since March of last year. The break of support ultimately generated a drop down to 21.77 but an oversold condition plus a re-test of the broken support level was to be expected. Since the break (8 weeks ago) the stock has successfully re-tested the 25.00 level on 4 different occasions and now seems poised to resume the downtrend and seek the next major level of support.
On a weekly closing basis, CSCO has even looked worse as the stock has continued to close lower each week after having had a successful re-test of the $25 level which happened two weeks after the break of support.
Resistance, on a daily and weekly closing basis, is major between 25.00 and 25.10. Support, on a daily closing basis, is decent at 23.94-23.99, minor at 23.42, and then stronger at 22.88-23.04. On a weekly closing basis, the only close-by support is at 23.30. The reality about these supports is that they are recent and overall not very strong. The 200-week MA is down at 22.45 and that must also be considered support, even though MA supports have been breaking recently due to the severity of the economic ills. Support will also be found down at $21, and strong psychological support at $20. Major support of consequence will be found down at the $17 level.
CSCO has now gotten rid of much of the oversold condition caused by the break from $34 to $23 and seems to be poised for a further break down to the $20-$21 level over the next couple of weeks.
Sales of CSCO at 24.92 and placing a stop loss at 25.40, on a stop close only basis and an objective of 20.82 offers a risk/reward ratio of 7-1. If an intra-day stop-loss is desired it should be placed at 25.70 (10 points above the most recent intra-day rally at 25.60) and would offer a 5-1 risk/reward ratio. Personally I prefer the stop close only stop loss as it is very unlikely that CSCO will be able to close above the major daily closing resistance at 25.10 as well as the previous major closing support at 25.30. In these volatile markets with wide intra-day swings, stop close only orders seem to work the best.
My rating on the trade is a 7 (on a scale of 1-10 with the strongest probability rating being 10).
ANGO (Friday closing price 10.53)
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 re-mention this week in ANGO is because this is not a stock that is often affected by the stock market and is still a good chart purchase. 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 lowered 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.
This past week ANGO did not get down to my desired entry point but if the indexes do get hit this week after the FOMC meeting, it may just affect this stock enough to get down to my desired entry point.
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 factor small, and the profit potential attractive, this trade becomes attractive enough to make.
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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 for the last 4 weeks, has been going sideways and has been unable to give any clear direction as to where the next $3-$4 move is coming. Nonetheless, in looking at the daily and weekly chart and seeing the economic situation becoming more dire every day, it now seems more probable that the downside will be the direction the stock takes. I think a big key to the NUAN chart is that the stock has been unable to get above the 20 and 50 week MA or above the 100 and 200 day MA's at any time over the past 7 weeks. In addition, the stock now shows consistently lower high weekly closes since February 13th and it now looks like this coming week will be a decision one. A daily close above 18.35 would take away most negativity but a close below 16.61 will now re-generate the negativity and thrust the stock down for new re-tests of the $15 level and a probable drop down to the low 14's. In addition, if the indexes do break down aggressively, as I believe they might, drops down to the $10 in NUAN might not be a fantasy.
VLO has me worried as I am not totally up on the relationship of the stock with the stock market and therefore this is one stock I have to look on its own chart facts and not colored with what the indexes might do. The close on Friday at 49.11 puts the stock right on the 200-day MA, which was expected to be reached, and is neither a negative nor a positive. In addition, since October 2005, the stock shows strong intra-day supports starting at 45.86, then 47.99, 46.84, 47.66, 47.80, and Friday's own low at 48.07. On a weekly closing basis that relates to 47.33, 48.16, 48.19, 49.19, and Friday's close at 49.11. Over a period of 30 months, this whole area has been one of major support and in reality, should not be broken unless there is a direct correlation to what the indexes will be doing. Over the next three days I need to see some divergence between the stock indexes and VLO. If that divergence does not occur and the stock starts to fall in conjunction with the indexes, it will be time to liquidate the position immediately. A daily close above 51.03 will begin to assuage my fears but a close below 48.16 will be a sell signal, in my opinion. KO made a new 7-month weekly closing low on Friday, when it broke below the 58.26 level. In addition, the stock closed just above the 200-day MA and the low of the inverted flag formation, on a daily closing basis, at 57.40. Any further weakness with a close below 57.40 will be an additional sell signal that projects to a low of $49. The chart does show intra-day support at 56.50 as well as the 50-week MA and that level may be supported. Nonetheless, a close below 56.50 will give an immediate objective of a drop down to the low to mid 53's. The support at 53.00-53.51 is considered minor and should only temporarily break the fall. At this time there is no strong resistance until 59.47, but the spike down type action on Friday, should now have the 57.99 to 58.26 level become a strong resistance. This is a stock that does not always follow the indexes and therefore the break on Friday was more indicative that it might have otherwise been. ITG has been a yo-yo stock over the past three days trading between 47.83 and 44.77. On a daily closing basis, support will be at 44.77 and resistance at 46.95. The weekly chart continues to show that the probability of a drop below 40.00 is very strong. For the time being this stock continues to be a volatile stock with wide swings of as much as $2-$3 per day, but should the stock close below 44.00 the downtrend should accelerate as there is no support until the 40.73 level is seen. 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. Nonetheless, with the rally in the indexes this past week, the break of the flag formation was stumped and the stock traded slightly higher to sideways. Nonetheless, on the weekly chart, the stock remains in a downtrend. JNJ hit the 20-day MA on the rally this past week but failed to break it, and began dropping down again. The formation continues to look very bearish and drops down to the 60.00 remain a high probability. A break of the 60.00 would be very negative and a drop down to the $57 level would likely ensue. Resistance, on a daily closing basis, remains very strong at 63.13. AA remains in a formation that is tilted toward the bullish side but seems to have run up against a strong resistance level that is unlikely to break without the help of the stock market. In addition, the formation seem to show an overbought stock and a short-term break down to the 35.00 level remains a good possibility. Without a doubt, though, if it wasn't for the weakness in the indexes, it is likely that AA would have broken its resistances and be trading higher. Nonetheless, this is a stock that has been reacting to the indexes and if they break this coming week, it is likely that the stock will break as well, at least down to the mid 33's or at least to the low 35's. The 38.71 level, on a daily closing basis, must be watched carefully as a close above that level could open the gates for further movement upward SBUX continues to look weak and sick and the recent rally this past week ended up being a strong and successful re-test of the original breakdown level at 18.10. As long as closes remain below 18.10 it is highly likely that a drop down to the $15 is forthcoming. A close this week below 16.80 will get the downtrend moving again and it should not stop until the $15 level is seen. SVNT is at a major pivot point that may or may not be tied in to the indexes. Because of the lack of knowledge on how this stock may react to the falling marketplace, it is difficult to hold on to long positions, if the present support level breaks. This past week on Friday, the stock closed exactly at both the 20-week MA and the 100-day MA, both around 18.30, and that is the only support parameter of consequence that can be found. The daily chart is tilted toward further downside but the weekly chart says there has been enough downside and the probabilities are slightly tilted toward up movement. A break below the low made this week at 17.58 will likely generate a re-test of the major breakout level at 15.75. Stops at 17.48 should be instituted. Under any conditions, this is a stock that is fundamentally bullish long-term, but since the company has not yet received FDA approval (a formality) or begun production for its Gout medicine the stock is likely to be sensitive toward general market conditions until then, and should be traded accordingly. TNE seems to have built a strong top formation and looks ready to continue to move downward. Back in the year 2000-2001 TNE was able to get above the $25 level on three separate occasions, over a period of a year. On each of those occasions, the stock retreated sharply. The first time it went down to the 15.84 level, the second time (most like the chart now) down to the 18.50 level, and the third time was the beginning of a long-term trend, which ultimately took the stock down to 8.21. TNE, over the past 8 weeks, has not only made a double top, when compared to the high made in the year 2000, but has also re-tested the top successfully on three occasions and now seems poised to go head lower on a consistent basis. The stock on Friday closed at the 50-day MA and any lower close than 23.89 this coming week, would likely take the stock down to the 22.30 level where the 100-day MA as well as the 20-week MA are currently located. Closes above $25 are no longer expected but should the stock close above the 25.40 level, the evaluation will need to be re-considered. Possible mid-term objective on TNE could be the $19 level.
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1) KO - Shorted at 57.44. Now averaged in at 59.03. Stop loss at 59.57 on a stop close only basis. Stock closed on Friday at 57.53.
2) TNE - Shorted at 25.58. Stop loss now at 25.55 stop close only. Stock closed on Friday at 23.89.
3) CCJ - Covered short at 39.67. Averaged in at 38.61. Loss on the trade $212 per 100 shares (2 mentions) plus commissions.
4) VLO - Covered short at 52.78. Profit of $1008 per 100 shares minus commission.
5) ITG - Shorted at 47.22. Stop loss at 47.10 stop close only. Stock closed on Friday at 45.04.
6) AA - Shorted at 38.93. Averaged short at 37.81. Stop loss now at 39.38. Stock closed on Friday at 38.39.
7) SBUX - Shorted at 17.69 (3rd mention). Averaged short at 18.10. Stop loss lowered to 18,54. Stock closed on Friday at 17.39.
8) JNJ - Averaged short at 62.66. Stop loss now at 63.40. Stock closed on Friday at 62.85.
9) GW - Shorted at 6.43. Covered short at 5.98. Profit on the trade of $45 per 100 shares minus commissions.
10) VLO - Purchased at 49.72. Stop loss at 48.08 stop close only. Stock closed on Friday at 49.10.
11) RX - Shorted at 24.52. Covered short at 22.02. Profit on the short of $250 per 100 shares minus commission.
12) ITG - Shorted at 47.61. Averaged short at 46.28. Covered short at 44.83. Profit on the trade of $290 per 100 shares (2 mentions) minus commissions.
13) SVNT - Purchased at 18.80 and then again at 17.72. Averaged in at 18.26. Stop loss at 17.48. Stock closed Friday at 18.29.
14) INTC - Short at 20.22 and then again at 20.66. Covered short at 21.21. Loss on the trade of $154 per 100 shares (2 mentions) plus commissions.
15) OVTI - Short at 17.07. Covered short at 17.81. Loss on the trade of $74 per 100 shares plus 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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