|
|
|
|
|
|
Issue #64 
March 23, 2008 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
|
| A Channel Swimmer?
DOW Friday close at 12361
The DOW was able to close out the week on a positive note and above the 12099 level of weekly closing support that had been broken two weeks ago. The ability of the DOW to reverse the break of support will likely ease the selling pressure and calm the markets down over the next few weeks and likely lower the volatility index.
Over the last month, the Fed has been as aggressive as they could be, within the context of a credit crisis unlike any ever seen before. They were successful in bringing a measure of stability to the marketplace by injecting liquidity, lowering the discount rate, lowering the Fed funds rate, increasing the amount of time the banks have to pay back loans, and guaranteeing some support to failed firms such as Bear Stearns. The opinions vary greatly in the financial community as to what end result of these Fed actions will be but there is a consensus belief that the Fed is willing to do everything possible to avert a financial and marketplace collapse. In and of itself, it is this belief that helped bring some stability to the indexes this past week.
Nonetheless, the Fed actions do not repair the problems that have been caused by the sub-prime mortgage crisis and the mounting losses that financial institutions have suffered and will continue to suffer. In addition, the lack of confidence now being seen in investors will not likely be repaired any time soon. It is evident the economy is facing an extended recession which includes mounting unemployment, inflationary pressures, lowered income and profits, as well as a long period of low growth. These are facts that the Fed can do little about and will likely cause further deterioration of prices in the stock market.
From a chart point of view, the rally on Friday restored a measure of calm to the market. It is now likely that the steep decline angle of the downtrend in the indexes will ameliorate and be replaced with a more orderly retreat that will include both rallies and drops, but at a slower pace.
As I mentioned this past week, I believe the DOW will now get into a large channel downtrend. A channel downtrend means that the DOW will probably be trading over a range of 800-1000 points but, overall, the peak highs will likely be lower than the previous peak highs and the peak lows lower than the previous peak lows. Channels do not usually have a steep slope and therefore it is also likely that 5-8 weeks will pass between the high point and the low point. Under this channel scenario it is also likely that resistance levels will not be reached and support levels will be broken. Moving averages, such as the 20 and 50 day and week will lose some value as well.
In looking at the two most recent peak low daily closes in the DOW we see 11971 followed by 11741. If I use the most recent high peak close in the DOW at 12743, it would be safe to assume that the top of the channel, on a daily closing basis, will now be in the mid 12500's. There is one additional factor that supports this level as a probable top. There is a very decent previous resistance level at 12573 (12552 on a daily closing basis), and the top of the channel as well as the daily closing resistance at 12552 seem to be in perfect unison. Support in the DOW will now be very decent at 12182 and then again at 11951. The bottom of the channel is likely to be in the mid 11500's.
Trading within a channel is not a straight up and down affair and is the reason why reaching the opposite side of the channel often takes as long as 8 weeks (on occasions even longer). Peaks and valleys within the channel are the norm and not the exception.
If I am correct in the assessment of the DOW channel, I would have to say that its likely the top of the channel will be reached this coming week. By the same token, drops from the top of the channel will probably be supported strongly, around 12000, the first time down. Choppy trading with an overall bias to the downside, will probably be the norm from here on in.
NASDAQ Friday Close at 2258
The NASDAQ was successful in getting back up to the 200-week MA on the close this past week, but was not able to reverse the break. The index did have to rally over 100 points to accomplish this but remains the week sister of the three indexes. In addition, the index did make new 17-month intra-day lows on Monday with the drop down to 2155, and therefore, continues to show a lot of weakness.
Like the DOW, the rally this past week in the NASDAQ also seems to be showing the possibility that the index is also getting into a channel downtrend but with a steeper angle. It is evident, with the new lows, that the NASDAQ remains the primary index to sell short.
The low end of the channel in the NASDAQ can be drawn by using the peak daily closing low on January 22 at 2292 and the most recent peak daily closing low at 2169. The top of the channel can be drawn using the 2413 top seen on February 1st, the high at 2374 on the 13th, and the high of 2332 on the 28th. Using those highs, the present top of the channel would be around 2300. There is very strong resistance in the NASDAQ at 2274 and it is possible that this index will not reach the top of the channel if that resistance level hold up.
There is also a gap area between 2314-2323 that has not been closed. On rallies above 2300 that level will be a magnet and its possible they will attempt to close it. Nonetheless, there is one additional resistance of consequence in the way of the 50-day MA, which is currently right around 2310. A close above the 50-day MA will generate a closure of the gap and a likely rally up to the 2364 level where the resistance is very strong. If that rally happens the downtrend channel will remain but will be less steep than the one I have mentioned above. It will be of the same angle of decline than the DOW is presently showing.
If the rally continues on Monday, as expected, it is likely that whatever high is seen this week will determine the angle of the channel. The next peak high of week will likely also be of great consequence.
S&Poors 500 Friday close at 1330
The SPX, like the NASDAQ, also made new intra-day lows but the daily closing price at 1277, became a successful re-test of the previous low at 1273. In addition, the index was able to reverse the break of the 200-week MA and is now set for further rallies. Like the other two indexes, the SPX also seems to be getting into a channel downtrend and will likely reach the top of the channel sometime in the first part of the week.
There is strong resistance from a couple of previous daily closing lows at 1339 and 1349 and the 50-day MA is currently right at 1344. Using the channel downtrend scenario and looking at the low peak daily closing lows at 1311 and then at 1273 it would seem to point to the 1350-1360 level being the likely top of the channel.
It seems evident that after adding all the dots in the chart, its highly unlikely the SPX will have much more success than an additional 20-30 point rally from Friday's close.
There is now very strong support in the chart at 1273-1277 and some support at 1300. Rallies up to the 1350 level, on a daily closing basis, are likely to be supported the first time around, at 1290-1300. Ultimately, though, if the channel downtrend is in effect, I would expect to see a drop and a close in the index somewhere around 1230-1237 in about 5-8 weeks.
It is evident that at this time, the "channel downtrend" is currently just speculation on my part as the top of the channel has not yet been firmly set in the DOW or the SPX. In channels, one must change the mindset of support/resistance as resistance levels are not usually reached and support levels tend to get broken more easily, or at some point in time. Nonetheless, based on the strength of the indexes on Friday but the existing fundamental weakness that the economy is experiencing, the probabilities are high that the indexes are in a channel downtrend.
The only other two possible scenarios are 1) a totally sideways market, in which case the DOW would likely go back to the mid 12700's (keep on trading between 12700 and 11700), or 2) a change of fundamentals that would cause the indexes to break resistances and get back into an up-trend (very unlikely). In addition, the fact that both the SPX and the NASDAQ made new intra-day lows this week seem to suggest that both the sideways or up-trend scenarios are strongly unlikely.
I do expect to see continued strength in the indexes the first part of the week and a close at the levels mentioned above. The rally would then be followed by a slow decline in the latter part of the week to test supports. Volatility this week should be greatly reduced and calmer trading should come back.
|
Stock Analysis/Evaluation
|
|
CHART Outlooks
Under the scenario outlined above, sales of stocks should continue to be the preferred way to go but the channel downtrend will restore some calm to the marketplace and stocks that show strong fundamentals and good chart pictures should enjoy rallies, though they may be limited in nature.
VLO (Friday Close at 49.51)
VLO is a stock that started a strong up-trend back in Jan04 from the $12 level that ultimately took the stock up to a high of $78.68 in Jul07. After the stock reached a high of $58 for the first time, all the major corrections that proceeded for the next 30 months (6 of them), were supported strongly between the $46 and $48 level. The moves up from those lows varied from a minimum of $10 to a maximum of $31 with the norm being between $15 and $18.
VLO last week broke below the $46 support level, intra-day, and went as low as 44.96. Nonetheless, the stock failed to confirm the break with a close below the lowest daily close in the last 30 months at 46.17 (stock closed at 46.69 that day). In addition, VLO managed to close a week ago Friday at the 200-week MA at 49.15 and confirmed that close as a successful re-test of the MA with a higher close this week at 49.51.
VLO seems to have exhausted the downside with the intra-day break and reversal and now seems poised to generate a rally that could be as little as $10 and as much as $18.
Support is strong, on a daily closing basis, between 47.33 and 48.16 with additional support down at 46.46. Resistance, on a daily closing basis, is minor up at 50.06 and then a bit stronger at 53.80-54.06. Resistance is once again found at 56.48, both from a previous low of consequence as well as from the 50-day MA. Major resistance is seen at the $60 level. On a weekly closing basis, you will find some minor resistance up at 53.59 and then a lot stronger at 55.89. Major resistance on a weekly closing basis is also 60.17-60.32.
This is not a stock that will ultimately mirror the DOW, but simply a stock that follows the difference in the price of oil and the demand for gasoline.
I believe the exhaustion spike seen last Monday and the failure to confirm the breakdown of the support level will give VLO a reversal pattern of consequence and generate the kind of a rally that the stock has often seen in the past. With the low at 44.96 and the norm of rallies being around $15, it is rational to believe that a rally up to the $60 could occur. If the minimal rally of $10 is used, then a rally up to the mid $55 level would be probable. Either way, this seems to be a good risk/reward play with a high probability of success.
Purchases of VLO between 47.80 and 48.16 and placing a stop loss at 46.36 on a stop close only basis and using a minimum objective of 55.39-56.50 will offer a risk/reward ratio of at least 4-1.
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 21.75)
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 7 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.
Over the last 5 of weeks INTC has built a decent support level down at 19.50, on an intra-day basis, and at $20 on a daily closing basis and seems to be trying to test the resistance levels above. The weekly chart looks quite bearish but rallies up to the 22.50-23.00 level would not negate the inverted flag formation and therefore a rally in the stock, in conjunction with a rally in the indexes, would not be considered bullish.
Resistance is quite strong, on a daily closing basis, at Friday's closing price of 21.75 and then again just as strong at 22.30. On a weekly closing basis, resistance is very strong at 22.13. On an intra-day and intra-week basis, resistance can be seen as high as 23.00 but the majority is also between 22.30 and 22.50. Support is strong at 19.50 (20.00 on a daily closing basis) but the support is considered suspect as there are 4 different lows at that price (double bottoms are considered very strong but more than 2 bottoms usually get taken out). It is therefore probable that the sellers will look to take that support level out as the stock approaches. Below the $20 level, on a daily closing basis, strong support found at 18.68 (18.05 intra-day), and then major again at the $17 level.
INTC will likely follow the DOW down after it reaches its level of upside resistance. It is probable that over the next few weeks the DOW will be making new lows, and its highly likely that INTC will at least break the 19.50 level of intra-day support when that happens. At the very minimum a re-test the 18.05 level will occur but drops down to the $17 level cannot be ruled out. Risk/reward ratio on this trade is excellent and the support/resistance levels are clearly outlined making this trade a must-do.
Sales of INTC between 22.25 and 22.50, placing a stop loss at 23.14 and having an objective of 18.68 will offer a 4-1 risk/reward ratio.
My rating on the trade is a 7.5 (on a scale of 1-10 with the strongest probability rating being 10).
CVS (Friday closing price 39.85)
CVS had been in a strong up-trend since 2003 when it rallied up from 10.98 to Nov07's high of 42.60. After having reached that top the stock went into a strong correction downward that culminated with a low at 34.91 made January 28th of this year. Nonetheless, the stock had not had a weekly re-test of the highs at any time during that correction and therefore it could not be said that it had "topped" out. After reaching the correction low at 34.91, CVS rallied all the way back up to a high of 41.15 where it failed to go any higher and subsequently corrected back down to the 37.40 level. The rally can be considered a successful re-test of the high, on both the daily and weekly charts and likely signals that the stock is now into a mid-term downtrend.
The recent rally back up above the $40 seems to be running into strong resistance as well as a strong psychological level and will be considered the second re-test of the downtrend if it fails to get above 41.15.
There is a double top on the stock, on a daily closing basis, up at 40.92 and intra-day resistance all the way up to 41.15. There is also a left shoulder resistance up at 40.72 that looms ominous as well. In addition, on the daily closing chart there have been 8 different times since Oct 27th where the stock had a small peak high close between 39.85 and 40.14, making that level a major resistance area. Intra-day rallies on those occasions did get up to as high as 40.57. Support is decent at 39.06, then at 38.66 and very strong at 38.00. Below that, resistance will be also very strong at 35.49-36.00. In looking at the weekly chart, though, support is decent at 38.61 from a previous weekly low as well as from the 50-week MA. Nonetheless, below 38.61 there is no support of consequence until 35.14-35.59. Major support is down at $31.
It seems probable that CVS has found at least a temporary top and that the stock is either on a sideways trading range between $35 and $40 or at the beginning of a downtrend that would carry the stock down to the $31 level. The probabilities lie on the side of a sideways trend.
With the expected rally this week on the DOW, it is probable that CVS will try once more to get up above the $40 level, on a daily closing basis. Intra-day rallies up to 40.57 might be seen. With very strong resistance at 40.14, again at 40.72, and a double top at 40.92, the stock presents a clearly defined opportunity to short with a risk/reward ratio that is very positive and clearly defined.
Sales of CVS between 40.13 and 40.50 and using a stop loss order at 41.25 and an objective of 35.16 will offer a risk/reward ratio of 5-1. It is very possible that within a couple of days the stop loss placing will be lowered to somewhere around 40.60 and therefore the risk/reward ratio will even be good for a minimum drop down to the 38.66 level.
My rating on the trade is a 7.5 (on a scale of 1-10 with the strongest probability rating being 10).
HRB (Friday closing price 21.09)
HRB is a stock, much like the DOW, that seems to be in a clearly defined downtrend channel on the weekly chart. Last week, the stock had a strong surge in buying, probably partly due to the rally in the indexes as well as tax season being in full swing. The rally evidently triggered a strong round of short covering and as the stock rallied and broke through resistances, stop loss orders were probably triggered as well. From a low of 17.32 on Monday, by Thursday it hit a high of 21.10 and a rally of almost $4 in a stock that normally trades very conservatively.
HRB seems to be in a clearly defined channel downtrend that began back in Aug06 with a low of 20.81 and a subsequent high 5 months later at 24.91. Since the channel begun, each major peak high has been lower than the previous one (at 23.89 and 22.49) and each subsequent low has been lower as well with peak lows at 20.88, 19.29, and the most recent at 17.18.
After HRB hit the most recent low at 17.18, the stock proceeded to re-test that low successfully with another low at 17.47. The successful re-test is what generated this strong rally to test the top of the channel, which is currently in the area of 21.55.
On a weekly closing basis there is very strong resistance between 20.81 (the original low and confirmed support prior to the breakdown) and 22.00. In addition, the 100-week MA is currently at 21.53 and should also act as strong resistance when added to the top of the downtrend channel. There is minor support at 20.50, some support, both from the charts and psychologically between 19.62 and $20, and then nothing until the 18.50-18.84 level is seen. Major support at 17.00-17.60.
HRB was a very successful trade for me a few months back and now that the stock has rallied, it seems that shorting this stock once again, is the way to go. With the recent move up, due to a large amount of short-covering as well as stops getting hit, it is likely that once the stock has shown that the buying is over, it may fall back down to the 19.62-20.50 level swiftly. It is also probable that during the tax season the stock may not go below the 18.50 level. Nonetheless, if the channel downtrend is still in effect, the possibilities of the stock dropping below $17 do exist.
Sales of HRB between 21.35-21.50 and using a stop loss at 22.28 and a minimum objective of 18.50 will offer a risk/reward ratio of 4-1. If the channel is still in effect, and somewhere around 21.50, as soon as that top is established the stop loss will be lowered and the risk/reward ratio will increase strongly.
My rating on the trade is a 7 (on a scale of 1-10 with the strongest probability rating being 10).
|
Updates
|
| Updates on Held Stocks
|
Open Positions and stop loss changes
|
|
NUAN could be one of the stocks that enjoys a rally under the scenario outlined above. The close on Friday has put the stock at a breakout point that is likely pivotal and, if broken (a higher close next week), will generate a short-term rally (2-6 weeks). The 20 and 50 week MA's are crossing and such a cross will likely generate strong movement in one direction or the other. The daily chart shows almost the same picture with the 100 and 200 day MA's also getting ready to cross at 18.25. A close on Monday at 18.35 or better, will not only break above both MA's but will also break a strong daily closing resistance at 18.35. A rally up to the $20 level would be anticipated, should that happen. On the other side of the coin, a close below 17.04 would likely be considered quite negative and generate a strong move back down to the $15 level. In looking at the weekly chart, I would venture to say that a trading range in NUAN, for the next few months, between $15 and $20 is the most likely scenario now.
KO had a strong rally this week but on Friday the stock was only able to close back up to the 20-week MA and the weekly chart formation still looks bearish. Of course, any further rallies, from this point on, would change the outlook of the chart. This is a stock that in the recent past has traded up as it nears option expiration days but then reverses itself and trades downward thereafter. This is not a stock that often mimics the indexes and therefore should trade on its own chart fundamentals and formations. The stock does not have any visual resistance until the mid 62's, other than the 20-week MA as well as the 100-day MA at 61.00 and therefore if the bearish chart formation is to be fulfilled, the stock should begin to move downward starting on Monday. Further upside on Monday will change the chart picture. It is likely, though, that drops down to the low 58's will be seen at some time even if such a rally occurs. Nonetheless, I do believe a decision will have to be made on Monday as to the mid-term outlook of the stock. ITG seems to be in a "channel up-trend" on the weekly charts but the trading range of the channel has been between $7 and $8 since the channel started on May 7th 2007. It seems that the stock recently hit the top of the channel on the rally up to the $50 and is now looking to get back down to the bottom of the channel around $42-$43. There is strong resistance at 47.35, on a daily closing basis, and it seems unlikely at this time that the stock will be able to close higher than that. There is decent support, on a daily closing basis, down at 43.21 but the bottom of the channel is down at 42.50 and it seems probable that at some time over the next couple of weeks that level will be seen again. JNJ has destroyed the negative inverted flag formation on all the charts and a drop down to the $57 level is no longer a viable option. Nonetheless, drops down to the $60 are still a possibility, though greatly reduced. The stock, on Friday, got up to the 20-week MA as well as a very decent resistance level up at the low 65's. In addition, on two of the last 3 days of trading, the stock tested the 100-day MA at 65.40 and was unable to close above it. If unable to close above that level on Monday, it is likely the stock will drop back down to the 63.72-64.00 level, which should now be considered strong support. Should JNJ be able to close above 65.40 on Monday, rallies up to the 65.84-66.22 will likely occur. Nonetheless, the resistance at that level is strong and should stop any further rallies from occurring. Should that rally occur, though, the likelihood of the stock being in a trading range between 66.22 and 63.91 will be high. If the rally fails here, drops down to the $62.50 will increase in probability. Drops down to the $60 will likely depend on how the stock does this week. SBUX continues to look weak but this week had a corrective rally upward that took the stock up to the 18.50 level. Nonetheless, the stock closed below the 18.29 level and continues to show the weekly downtrend is still in effect. Resistance, on a daily closing basis, continues to be very strong between 18.10 and 18.29, and support is now found at 17.26 and 16.80. I do believe that SBUX will continue to track the indexes and if the channel downtrend in the indexes is correct, this stock will continue to make new lows within the next couple of weeks. SVNT, on the weekly chart, is still in a major up-trend but does have to two weekly closes below the 20-week MA (caused by the steep decline in the indexes) which has the stock on the defensive and awaiting further fundamental news. On the daily charts the stock did close below the 100-day MA on three occasions this past week and unless that is reversed this week, could carry the stock back down to test the breakout level at 15.75 as well as the 200-week MA. A daily close above 19.02 would break a previous resistance level as well as reverse the break of the 100-day MA. I would have to say that is an important pivot point for the stock at this time. This is a bullish fundamental stock that has reacted to the steep decline in the indexes. If the indexes calm down, speculative buying may come in at these lower prices. 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 likely 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 right below the $25 once more and will likely react to the indexes this week as well. Probable trading range this week will be 25.40-23.40. Overall, though, the stock looks like it wants to head down to the $20 level. HON had the lowest weekly close since Apr07 and looks like it wants to head lower. Even with the strong index rally on Friday, the stock was unable to rally sufficiently from the lows at 53.50 to prevent the break of weekly support at 54.69. A sell signal was generated and if confirmed next week with another close below 54.69 will likely cause the stock to drop down to the 100-week MA at $50. The daily chart did not have a breakdown on Friday as the lowest daily close since Apr07 has been 53.09, nonetheless, it did break below the most recent low close at 55.22 and therefore shows continuation of the recent downtrend the stock has been having. Rallies up to the 55.22 level, on a daily closing basis, are possible but if the stock continues to close below that level, pressure will continue. Should the indexes reach their upside goals on Monday or Tuesday and then start to come down (as I expect they will), HON will likely head lower and confirm the break next Friday. CSCO seemed to generate a break of resistance on Thursday when it closed above the 25.10-25.30 level, on a daily closing basis. Nonetheless, on Friday that breakout was negated when the stock once again closed below the $25 level. In addition, the weekly chart still shows that the resistance at 24.96 was not broken as the stock closed at 24.79. In looking at the daily charts, once again the 25.10-25.30, on a closing basis, will continue to be strong resistance, though a close at one of those two levels is expected when the indexes stage their rally up to the top of the channel downtrend. It is evident that this level continues to be a major pivot point in the stock and it is likely that by next Friday, things will be much clearer. Lower prices are the most likely scenario. BRCD did not do anything of consequence this past week but seems ready to break below the $7 level as soon as the indexes start heading lower. The trading range in the stock is clearly evident between 7.00 and 7.50 and a close above or below either of those two levels will likely signal the next $1 move. With the indexes likely strong on Monday and perhaps a bit more on Tuesday, I would tend to think the 7.50 level will be tested at least once. If the stock fails to close above that level, I would expect the 7.00 to be tested, and likely broken, below next Friday.
|
1) KO - Shorted at 57.44. Now averaged in at 59.03 (2 mentions). No stop loss at present time. Stock closed on Friday at 61.03.
2) TNE - Shorted at 25.58. Added at 24.28. Averaged in at 24.93. Stop loss now at 25.55 stop close only. Stock closed on Friday at 24.98.
3) HON - Shorted at 56.41. Stop loss at 57.10 stop close only. Stock closed on Friday at 54.29.
4) CSCO - Shorted at 24.80. Stop loss at 26.70. Stock closed on Friday at 24.79.
5) ITG - Shorted at 47.22. Stop loss at 47.10 stop close only. Stock closed on Friday at 46.51.
6) AA - Covered Short at 37.23. Averaged short at 37.81 (2 mentions). Profit on the trade of $129 per 100 shares (3 mentions) minus commissions.
7) SBUX - Averaged short at 18.10 (3 mentions). Stop loss lowered to 18,54. Stock closed on Friday at 17.50.
8) JNJ - Averaged short at 62.66 (2 mentions). No stop loss at present. Stock closed on Friday at 65.38.
9) BRCD - Shorted at 7.32. Stop loss at 7.71. Stock closed Friday at 7.24.
10) VLO - Purchased at 49.72. Liquidated long at 47.95. Loss on the trade of $177 per 100 shares plus commission.
11) SVNT - Averaged long at 18.26 (2 mentions). No stop loss at present. Stock closed Friday at 18.53.
Previous Newsletters
|
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. |
|
|
|