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Issue #65 
March 30, 2008 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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| A Trading Affair?
DOW Friday close at 12361
Within the anticipated context of a channel downtrend, the DOW did everything this past week that was expected for it to do. The close on Monday at 12548 was within 4 ticks of what was proposed to be the top of the channel and the weakness seen throughout the rest of the week confirmed that that index may have seen the high of this recent rally.
If in effect the DOW is in a channel downtrend, the high of 12548 will no longer be seen and rallies will fall short of that level. In addition, drops will be successful in breaking previous support levels consistently. In addition, in a channel downtrend there is normally an inside channel and an outside channel. An inside channel is a range parallel to the outside channel that will be seen on several occasions, within the 8 week period of time that it will probably take to reach the opposite side of the channel. In this particular case the inside channel is likely to show a trading range this coming week between 12315 and 11950. If that range is what is seen this coming week, then the channel downtrend will be confirmed.
Resistance should now be strong at the top of the inside channel at 12315-12330. In addition, that is also where the 50-day MA is currently located. Actual resistance will be strong at 12393, on a daily closing basis. Strong support is found at 12182, minor at 12100, and then decent at 119.70. Nonetheless, the bottom of the inside channel will be at 11950 and since supports usually get broken in a channel downtrend, it is likely the aforementioned supports will be broken this coming week. The bottom of the outside channel downtrend is likely to be around 11573 but it is not likely that the DOW will be getting anywhere near there for a few weeks.
Though the channel downtrend has not been yet confirmed, it seems that the action this past week was totally within the context of it. This coming week will likely give confirmation and, if that happens, the parameters of trading will get clearly defined.
I do expect just the opposite this coming week of what we saw this past week. I expect to see weakness on Monday and Tuesday and a drop down to the 11950 level and then a recovery going into the latter part of the week with a rally up to the 12315 level.
It is evident that the bulls failed to capitalize on the momentum that was created with Monday's strong rally. The consistent deterioration in price, lack of volatility, and the mood change as the week progressed, seems to underline the fundamental weakness that is being seen in the economy and that is not likely to change any time soon. Such a bearish fundamental scenario will continue to pressure the indexes over the next few months. Nonetheless, the confirmed effort and desire shown by the Fed in helping the banks, and the economy get through this problem and/or recession, will keep a candle of hope lit and generate swings in price as the indexes slide lower.
NASDAQ Friday Close at 2261
The NASDAQ had a wild week only to end up where it all started. The index on Tuesday saw a high of 2347 (89 points higher than last week's closing price) and by the end of trading on Friday was right back to within three ticks of last week's closing price of 2258. The failure to hold on to its gains as well as confirm a breakout above the 200-week MA, will likely weigh heavily on the index.
This past week, the NASDAQ took on the role of the leader of the indexes as it had several resistance levels of consequence that it was able to break through, during the week, including the 100-week MA. Had it been able to confirm those breaks of resistance, the bulls would have been able to hail it as a success. Nonetheless, when it was all said and done on Friday, it can be said that nothing positive was accomplished. The bulls will likely see the action of the week pessimistically and as a bad omen.
The NASDAQ did rally close to a previous resistance level, on a closing basis, at 2354. The index got as high as 2347 and closed at 2341 but was not able to go any further. That 2341 level is now major resistance. Support is decent at 2253 and very strong at 2200, on an intra-day basis. On a closing basis, there is no support until 2177 (minor) and then at 2169-2177 (major).
Though the NASDAQ does not have a clearly defined downtrend channel, as the DOW has, it does look probable that this week the downside will be visited first. There is no support of consequence on the daily charts for another 50 points from Friday's closing price. A drop down to the 2200-2208 level is very likely to happen in the first couple of days of the week. Like the DOW, I do anticipate a rally toward the latter part of the week but the index will likely find strong resistance at 2279, on a daily closing basis. 2279 was a major support level prior to the break down that took the index down to 2155. The index did break above that price this past week but failed to maintain that break and closed below it on Friday. It is now likely that 2279 will become a resistance level of consequence.
In looking at the weekly chart it seems this past week was simply a small corrective rally or a pause in the downtrend. The downtrend seems to be continuing and it is once again likely that the NASDAQ will take the lead role to the downside.
S&Poors 500 Friday close at 1315
Like the DOW, the SPX has a clearly defined channel downtrend that was likely defined with this week's action. The top of the channel was at 1350 and with the close on Tuesday at 1353 it seems evident the top was not only tested but that a high of consequence was set. In the past, the SPX has been the chart leader, as far as signaling the probable action. With the close on Friday's being below an important previous support level at 1326, it seems that the index is once again showing the way.
On a daily closing basis, there is strong support in the SPX at 1311 and then minor at 1298. Strong resistance is now 1331. As with the DOW, the SPX also seems to have an inside channel though the difference between the inside channel and the outside channel is smaller than in the DOW. Since supports do tend to get broken when in a channel downtrend, the objective of the of the inside channel this week is likely to be 1290. There is very strong support at 1273-1277, on a daily closing basis, but that level will not likely be seen this week. The top of the inside channel is 1326 and if the indexes rally toward the latter part of the week, that would be the objective.
Like I mentioned above, the SPX is often the leader in the charts and the fact that on Friday the index broke and closed below a previously important intra-day low at 1317 seems to point to decisive follow-through to the downside on Monday or Tuesday of next week.
Probable range for next week in the SPX is 1290-1326. The 1326 level will likely be seen toward the latter part of the week.
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.
Even though the "channel downtrend" has not been confirmed as of yet, this week's action has substantially increased the probability of it being in place. Under this scenario, the indexes will continue to work with short-term peaks and valleys, with a negative bias. Moving from a peak to a valley and back to a peak will likely not take longer than one or two weeks and it will seem somewhat choppy and haphazard. The bias, though, will always be toward the downside.
Next week begins a new, earnings reporting period and that will likely generate much of the choppiness that is expected. With the Fed out of the picture for the next few weeks, it is likely that earnings reports in specific companies will be a short-term catalyst.
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Stock Analysis/Evaluation
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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.
This week there will be a couple of purchase mentions but they will be short-term in nature. It will be difficult for long positions to maintain their rallies and therefore rallies will likely have short lives.
KGC (Friday Close at 22.78)
KGC is a gold stock that seems to be in a corrective phase and is giving signals that it might have topped out, though no confirmation has yet been given. Because the inflation situation is still a big concern and not likely to go away soon, it must be assumed that gold stocks will continue to rally. Nonetheless, the price of gold recently took a sharp move down, and stocks such as KGC are giving chart signals that are conflicting. It's not likely that conflict will be resolved clearly for a couple of weeks. In the case of KGC, the stock seems to be offering a dual opportunity to be both a seller and/or a buyer at either the support or the resistance level (whichever is reached first).
KGC gapped down last week from a support level of consequence at 24.14 and the stock has been unable to close the gap as of yet. The gap did take the stock down to a major level of support at 20.49 where the 100-day MA is currently located as well as a major previous high that was in place for over 2 months back in Nov-Jan. The drop down to that level encountered enough buying to prevent a further drop and a rally ensued that took the stock up "toward" the resistance level and gap area that is now considered major resistance. Even though the stock did move up "toward" that level it did not reach it and it seems very likely a second attempt will ensue. The probabilities are very strong that KGC will be trading over the next couple of weeks between both support and resistance. The probable trading range is large enough to offer good risk/reward ratios on both sides of the coin.
Support is very strong at 20.84 and again at 20.34, on a daily closing basis, and at 20.49-20.65 on a recent intra-day basis. The 100-day MA and the 20-week MA are currently located at 20.94 as well. Resistance is decent at 22.33-22.43 on a daily closing basis but on an intra-day basis the resistance is seen between 23.70-24.05, both from two previous important highs at that level and one previous important low at 23.70. The gap area will also work as a strong resistance at the gap is at 24.19-23.84. In addition, there is one additional resistance level at 24.52 where a previous high is seen as well as the 20-day MA.
Since the stock is still in an up-trend and inflation as well as the price of gold still in people's minds, it is therefore likely that the long side is just a bit more attractive than the short side. Nonetheless, the resistance level is so clearly defined, the price of gold having recently taken an unexpected tumble below $1000 an ounce, and the recent drop and gap in the stock chart being indicative, that the risk/reward ratio on both sides of the trade is attractive. Support level is likely to be tested at least once and since this is a stock in an up-trend, it is also highly likely that the gap area will at least be tested once more, if not closed. Such facts make this trade a good dual opportunity.
Purchases of KGC at 20.94 and using a stop loss at 20.39 and an objective of 23.90 will offer a risk/reward ratio of over 5-1. Sales of KGC at 23.90 and placing a stop loss at 24.62 and having an objective of 20.94 will offer a 4-1 risk/reward ratio.
My rating on the trade is a 7.5 on the buy side and a 6.5 on the sell side (on a scale of 1-10 with the strongest probability rating being 10).
OVTI (Friday close at 17.81)
OVTI seems to be a stock that is getting near to a temporary top after a very strong 5-week run up that started Feb20th at 12.09 and saw a high of 19.75 on Tuesday of last week. The stock seems to be in a corrective phase that fits in well with my channel downtrend scenario, as far as seeing further weakness on Monday and Tuesday. The corrective phase will likely take the stock down to the support level where a short-term purchase might be considered.
OVTI may or may not have seen a temporary top with the rally up to 19.75 but the corrective phase is necessary in order for the bulls to feel more comfortable in purchasing the stock in order to either re-test the high or continue the up-trend. A move down to support, followed by a rally up to test the recent high, is the least that is expected. Nonetheless, it is possible that after a successful re-test of support that the stock may continue higher thereafter. That will be determined after the correction is over.
Support is decent at 17.50 from both a previous daily low close as well as the 50-day MA. Nonetheless, should the support at 17.50 be broken, on a daily closing basis, there is no support until 16.83 is seen (minor) and then 16.30 (much stronger). In addition, the 200-day MA is found at 16.15 as well as a very strong and clearly indicative intra-day low at 15.73. Resistance, on a daily closing basis, is decent at 18.29-18.53 and major at 19.63. Should the stock break below the 17.50 level this coming week, on a daily closing basis, that level will also become a minor resistance as well as important pivot point.
With the weakness expected to be seen in the indexes on Monday and Tuesday, I would expect that OVTI will break below the close-by support at 17.50 and drop down to the 16.30 level (15.73 intra-day). Such a break would be considered a corrective phase break and since the recent high at 19.75 has not been re-tested, a rally back up should ensue after testing support.
Purchases of OVTI between 15.73 and 16.32 and placing a stop loss at 15.63 and having an objective of at least 18.61, will offer a risk/reward ratio of over 4-1. It is possible that OVTI may go higher than 18.61 and perhaps even make a new high above $20, with a small possibility of reaching as high as 21.90. If that were to happen, the risk/reward ratio would climb 8-1.
My rating on the trade is a 7.5 (on a scale of 1-10 with the strongest probability rating being 10).
JNPR (Friday closing price 24.30)
Since the early part of January, JNPR has been a great trading stock as it has traded 95% of the time in a clearly defined trading range between 23.43 and 27.86. The stock now finds itself near the lower part of the trading range and with the anticipated weakness of the indexes, during the first part of the week, JNPR will likely get down to an attractive purchase level. With the anticipated rally in the indexes toward the latter part of the week a purchase of this stock could generate some fast profit.
JNPR shows consistent support between 23.42 and 23.97, on an intra-day basis, as the stock has been down in that area of 4 different occasions during the last 8 weeks. On a closing basis, support is found at 24.60 and then again at 24.26 but the stock recently broke below the 24.60 level and was only able to generate a close at 24.26 before rallying again. Another lower close, below 24.26, should not cause a sharp decline. Resistance is presently found at 26.91 and then much stronger at 27.51-27.83. Minor resistance at 26.22.
The stock has had a bearish bias during the past couple of months but has traded mostly in a sideways fashion and trading the range has been the way to go. With the indexes likely to be in a downtrend channel with peaks and valleys, it seems likely that JNPR will move in conjunction with the indexes. The anticipated weakness of the indexes in the first part of the week and the possible rally toward the end might be mirrored by this stock. The trading ranges seen in JNPR during the last couple of months, allow for good risk/reward ratios on a short-term basis.
A purchase of JNPR between 23.80 and 23.90, placing a stop loss at 23.32 and having an objective of 26.21 offers a 4-1 risk/reward ratio. This is also a stock that you may want to go short at the end of the week should the 26.21 level be reached.
My rating on the trade is a 6 (on a scale of 1-10 with the strongest probability rating being 10).
MT (Friday closing price 80.34)
MT is a foreign owned stock that had been in a strong up-trend since 2006 from a low of $28 to the high seen last October at 83.88. At that price the stock went into a corrective phase which took the stock down to the $55 level in just a few months. Since that correction occurred MT has come back up to the $80 level and seems to be wanting to break above it and re-start the up-trend. Nonetheless, the world economy does not seem to be cooperating very well and therefore the stock presents a value play opportunity to short.
Since September of 2007, MT has traded 80% of the time between the $68 and $80 level with only two exceptions. A mini 3-day rally up to 83.88 seen in October 26-30 and a 4-week drop in Jan-Feb that took the stock down to the $55 level. Other than those two periods, the stock has been in that wide trading range between $68-$80. There does not seem to be any strong reason at this time, chart-wise, to think the stock will start trending higher.
Resistance is found at 83.88, on an intra-day basis and at 81.94 on a daily closing basis. There is quite a bit of overall resistance between $80 and $81 on an intra-day basis as well. Nonetheless, the most recent high close a few days ago at 80.40 seems to suggest the stock is trying to go higher short-term. Support is decent, on a daily closing basis between 75.31 and 76.03. Stronger support is found at 74.09 and then again at 72.04 and major at 68.33-63.78. The support at 72.04 seems to be the most probable objective as that is also where the 50 and 100 day MA's are currently located.
The recent action on the chart (last 3 days) seems to show a desire by the bulls to test the 83.88 level (81.94 on a closing basis) this coming week. Nonetheless, with the chart pattern of the last 6 months as well as the economic situation now being seen worldwide, the probabilities of higher prices for MT seem to be limited.
Sales of MT between 82.40 and 83.88 and having a mental stop loss at 81.14 on a "stop close only basis", or an intra-day stop loss at 84.08 and an objective of 72.04 will offer a risk/reward ratio of over 5-1. With the "stop close only stop loss" being below the desired entry point this trade becomes quite tricky and a decision will have to be made if the short position is instituted at the higher price but the stop loss is being triggered on the close. A close above 81.94 will be considered a breakout and that is the reason for putting that kind of stop loss order. Nonetheless, an intra-day rally up to 83.88 is also quite possible and should be taken advantage of, if it happens.
My rating on the trade is a 7 (on a scale of 1-10 with the strongest probability rating being 10).
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Updates
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| Updates on Held Stocks
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Open Positions and stop loss changes
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NUAN will show an intra-week double top on the weekly chart if the stock trades below 17.28 this coming week. On the daily chart, that double top already exists and the likelihood of a drop down to the double bottom at 16.38 is high. A break under 16.38 will generate an objective of 14.40, based on the double top. Using the weekly chart, though, the possibilities of a drop to 15.89 are strong and the reality is that if the stock gets down again to 16.38 a triple bottom would exist, and those usually get taken out. The bullish formation that NUAN had tried to build is now gone and the stock is back on the defensive, though not back in a downtrend as of yet. A close below 15.89 at any time, will thrust the stock down to the $15 level, on a daily closing basis, and down to perhaps as low as 14.14 on an intra-day basis. Chart is looking fragile now.
KO finally showed that at least a short-term top has been reached by closing on Friday below last week's close. It is now likely that the sellers will be able to be successful to get the stock back down to the 59.65-60.00 level this coming week. A daily close below 59.86 will generate further downside but its going to be hard to accomplish that feat. The indexes will likely be weak on Monday and perhaps Tuesday but likely strong the rest of the week and the stock is not likely to close below 59.86 under that scenario. Liquidating the short positions on the break below 60.00, will likely be the way to go ITG closed on Friday right above the support level at 44.83-45.15. With the expected weakness in the indexes in the first part of the week, it seems possible that the stock will get down to the 42.50-43.21 level of support. Should that happens, profits should be taken. If the stock closes below Friday's close at 45.34 on Monday, it will be breaking the 100-day MA and a drop down to the 200-day MA at 43.53 will likely happen. On a daily closing basis, a close at 43.53 would be likely and could be seen as a successful re-test of the 43.21 lowest closing low since Jan. With this stock in a channel up-trend, this opportunity should be used to liquidate short positions. JNJ has been coming back to re-test the breakout from the 64.00 level which was previously major resistance. A drop down to the 63.60 level is likely and should be used as an opportunity to get out of short positions. The chart has definitely changed and now looks tilted toward further upside movement as soon as the re-test is over. With the indexes likely to be weak the first part of the week, it is not likely that a better opportunity to liquidate short positions will present itself. SBUX broke on Friday below the previous 4-year low close at 17.10. Unfortunately the close was only by 5 ticks so it was not a decisive break. Nonetheless, the stock was able to close below two recent daily low closes at 17.50 and 17.26, though still above the lowest daily close in 4 years at 16.80. Nonetheless, with the weakness expected in the indexes, it is probable that the stock will break that last support and continue to the downside. There is no visible support under 16.80 until the low 15's are seen. SVNT was unable to give a breakout signal with a close above $20 on Friday and seems destined to test the daily closing support at 18.89. Nonetheless, this is a stock that seems to be ready to re-start an up-trend and after the early week weakness in the indexes it could head back up-wards toward the end of the week and a close above 20.03 would be a buy signal. A re-test of the 18.89 level is actually a need in order to give the bulls a defined level of support from which to launch a strong rally. TNE got a strong fundamental piece of news on Friday with the acquisition of a large Brazilian telecommunications network and generated a strong rally. Nonetheless, the stock was unable to get above the important 26.73 level of resistance and therefore it is evident that either the news needs to be assimilated and evaluated for what it means or the news itself was not so strong as to break above resistance. It is evident, though, that if the stock is able to break above 26.73 on Monday, that liquidating the short positions will need to be considered. Especially since the stock is not likely to be getting help from the indexes themselves. More information as it becomes available on Monday will be forthcoming. This is not something that can be planned this weekend HON was a yo-yo this week but fortunately with an overall negative bias. On a daily closing basis, though, the stock now has a very narrow range where a signal might be given. On the upside, a daily close above 56.00 would be positive and on the downside, a daily close below 55.00 would be negative. With the indexes likely to be under pressure at the beginning of the week and the trend being down in the stock, the downside is still the most probable. The weekly chart still looks quite bearish though a rally up to the 57.41 could occur, even in a bearish chart. CSCO was not able to give a strong signal on Friday regarding the resumption of the downtrend but on the other side of the coin, it was able to negate all the bullish action seen in the first part of the week. That, in and of itself, was a victory. The stock was able to close below two previous daily closes of importance at 24.29 and at 24.47 as well as below the 20 and 50 day MA and it is likely the break will continue the early part of next week with the weakness expected in the indexes. There are three other daily close support levels at 23.94, 23.42, and 23.08 before reaching the lowest daily closing support at 22.88 in the last 18 months. It is evident the stock has its work cut out for it, if it hopes to break all supports. Because of the nature of the channel downtrend in the indexes and the layered support in the stock all the way down to 22.88, I will look to liquidate the short positions if the 22.88 level is not broken by Tuesday. I will look to re-short the stock on any rallies back up to the mid to high 24's but if the stock gets down to the low 23's (and no more) I will liquidate. BRCD did not do anything of consequence this past week but did test the resistance level strongly on Monday and Tuesday and is now under pressure. With the indexes likely to be under pressure the first part of the week, the possibility of the stock breaking below the $7 level are strong. If that happens, the short will gain a lot of strength for a further drop of about $.80 cents. HRB finally gave a signal that it has found a temporary top when it closed below last weeks close at 21.09. In addition, the rally up to test the major resistance up at $22 was successful as the stock was unable to go furhter. It is now likely the stock will be trying to test the support levels below. Intra-day drops down to as low as 19.66 (20.00 on a daily closing basis) are likely if the indexes show weakness the first part of the week. Any drop below $20 should be used to take profits on short positions. I can certainly see that happening on Monday or Tuesday. This is a stock worthy of re-shorting on rallies back up toward the $22 level. INTC will likely show weakness on Monday and Tuesday but will likely hold itself above the $20 level this first time around. Profits on short positions should be taken on drops down to 20.30-20.15 and if achieved, re-shorting the stock on a rally back up to the 21.75 level would then be the way to go.
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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 60.93.
2) TNE - Shorted at 26.15. Averaged in at 25.336. Stop loss now at 26.40 stop close only. Mental stop loss at 26.83. Stock closed on Friday at 26.35.
3) HON - Shorted at 56.41. Stop loss at 57.10 stop close only. Stock closed on Friday at 55.85.
4) CSCO - Shorted at 24.80. Stop loss at 26.10. Stock closed on Friday at 24.08.
5) ITG - Shorted at 48.06. Averaged in at 47.64. No stop loss at present. Stock closed on Friday at 45.34.
6) HRB - Shorted at 21.98. Stop loss at 22.28. Stock closed on Friday at 20.96.
7) SBUX - Averaged short at 18.10 (3 mentions). Stop loss lowered to 18,10. Stock closed on Friday at 17.05.
8) JNJ - Averaged short at 62.66 (2 mentions). No stop loss at present. Stock closed on Friday at 64.18.
9) BRCD - Shorted at 7.32. Stop loss at 7.71. Stock closed Friday at 7.28.
10) VLO - Purchased at 47.83. Stop at 47.53. Stock closed on Friday at 48.95.
11) SVNT - Averaged long at 18.26 (2 mentions). No stop loss at present. Stock closed Friday at 19.46.
12) CVS - Shorted at 41.01. Stopped out at 41.27. Loss on the trade of $26 per 100 shares plus commission.
13) INTC - Shorted at 22.29. Stop loss at 22.55. Stock closed Friday at 20.79.
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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