With a negative scenario facing the indexes, short positions will once again be the preferred way to go. Nonetheless, short positions present a challenge as the most negative trending stocks have already moved down and far away from resistance levels where the risk can be limited.

This week there will be a couple of stocks that I will mention on the long side. If the stock indexes break as expected, it is possible that fundamentally strong stocks will reach downside targets of consequence where they may become attractive purchases. None of these stocks should be considered as purchases unless the indexes break down and the stocks hold their support levels. In simple words, these stocks should not be purchased Monday or Tuesday but likely toward the latter part of the week.

NTES (Friday Close at 19.14)

NTES is a stock that has been in a trading range between a high of $25 and a low of $15 for the past 30 months. Back in November the stock rallied up to the $24 level but gave up the rally in a period of 4 days and dropped back down to the mid 19's level. The drop included a gap down opening from 21.85 down to 20.68. After the drop down to 18.46, NTES staged a rally that took it back up to 21.18 and into the gap. NTES was unable to close the gap and the failure to do so created a negative scenario where the stock dropped back down to the 18.59 level two weeks ago.

For 30 of the last 60 trading days, NTES has traded between 18.46 and 19.60 and the chart now shows a head & shoulders type formation that if broken would generate a strong downside move. It is not a true head & shoulders formation as it is not the top of a rally but it does show two necklines between 18.48 and 18.65 and two shoulders at 19.60.

The inability to generate a rally above 19.60 for the last three weeks and the failure to close the gap on the rally up to 21.18 has now greatly increased the probabilities of the stock breaking support and generating a move down to the $15-$16 support area again.

There is strong support at 18.65 and again down at 18.45 (18.67-18.71 on a daily closing basis). If broken there is no support until the 16.50 level is seen. On Wednesday, NTES also got down to the 100-day MA at 18.90 which will also offer some support. Resistance is very strong at 19.60 (19.40 on a daily closing basis).

With the indexes likely breaking down this week, NTES offers a particularly attractive opportunity as this is not a stock that has yet to suffer a strong drop in price and yet if the support level breaks there is no support whatsoever for over $2.50 on the downside. No sell signal has been given yet but the odds are presently in favor of a break of support. At this time, the risk/reward ratio is quite good.

There is a gap that has been left unclosed between 15.50 and 15.85 and that gap will become a magnet if the support at 18.50 breaks. Based on the 2-year sideways trading range between $15-$25 and the downtrend the indexes are presently experiencing, the likelihood of the stock getting back down near the $15 of support is very strong. In addition, the recent action of NTES seems to be conducive to a break of support and a move down.

Sales of NTES at Friday's closing price opf 19.14 and placing a stop loss at 19.70 and an objective of 15.50, will offer a risk/reward ratio of almost 8-1. If you want to wait until the support level at 18.50 breaks and assure yourself a higher probability rating for the trade your risk/reward ratio would drop to 3-1 initially. Nonetheless, upon the break of support it would be likely you would be able to lower your stop loss point within a day or two.

My rating on the trade is a 7 with a sale at Friday's closing price and an 8.5 on a break of support at 18.50 (on a scale of 1-10 with the strongest probability rating being 10).

WIND (Friday close at 8.22)

WIND is a stock that I believe is bottoming out after having dropped from 12.65 down to 7.88 when it failed-to-follow-through on the breakout above an important previous weekly high resistance level at 11.92.

The 7.87-7.89 level, on a daily closing basis, has been a very strong support on three occasions since 2004. From what I have been told, the fundamentals of this company are strong and therefore the stock is not likely to break its major support level in existence for almost 4 years, even if the indexes break down.

Just last week, on Wednesday, the stock made a new 52-week low with a drop down to 7.88 and managed to rally 85 points intra-day and close 58 points higher than the previous close at 7.92. The spike type action as well as the biggest one day upside range in many months seems to underline the fact that the support level at 7.88 continues to be populated with "strong" buying interest. With the stock being very oversold and the major support seemingly still strong, purchases of WIND offer a great risk/reward ratio with a good probability rating.

Support is very evident at 7.88 but if broken there is no support until 6.13. Resistance is now found at Wednesday's high of 8.73 (also where the 20-day MA is presently at). Resistance above 8.73 will be strong at 9.60 and thereafter there is little resistance until the objective of the trade is reached at 11.55.

Purchases of WIND at 7.98-8.04 and placing a stop loss at 7.78 and an objective of 11.55 offers a risk/reward ratio of 14-1.

My rating on the trade is a 7 only because the downtrend on the indexes. This trade would command a 9 rating if the indexes were not under pressure (on a scale of 1-10 with the strongest probability rating being 10).

EPIC (Friday closing price 11.87)

EPIC has been in a trading range of consequence for the last 5 years between a low of $10 and a high of $16. Nonetheless, in looking at the weekly chart during those 5 years it seems that a very small but evident downtrend is in effect. With the indexes under strong pressure the possibilities of the downtrend continuing is strong and the possibility of the support level at 9.50-10.00 breaking has increased.

Between October 4 and October 29 EPIC went straight down from a high of 14.04 to a low of 10.88. Since October 29th the stock has basically traded sideways between 10.48 and 12.12 with the $12 level being a very pesky and strong resistance level during this time. Using the weekly charts, the formation looks like a wide inverted flag formation. If the bottom of the flag is broken (a move below 10.48) an objective of $8 would be given.

Resistance is very strong in the low $12 area with a major intra-day low at 11.98 seen on August 9th, followed by 9 intra-day highs seen since, between 11.96 and 12.12. In addition, the 100-day MA is currently at 12.25 and continuing to drop. Recent support seems to be strong between 10.48 and 10.98 and the probabilities of the support level holding again, should the stock fall, do exist. There is also strong support at 10.00 and again at 9.50 should the 10.48 level break. Below 9.50 there is no support until the $5 level is approached.

The weekly chart seems to be favoring the downside and with the indexes being under such pressure and likely to continue down, the probabilities of EPIC going down from here are quite high. Though there is quite a bit of support between 9.50 and 10.50, the inverted flag formation is clearly defined and offers an objective of $8 should 10.48 get broken.

Sales of EPIC between 11.87 and 12.12 and using a stop loss at 12.35 and an objective of $8.00 would offer a risk/reward ratio of over 10-1. Even if the inverted flag formation does not bear fruit, drops down to the $10 are still highly probable, if the indexes keep breaking down. If the $10 level is used as an objective the risk/reward ratio drops down to about 3.5-1 which is still attractive as the trade does have a high probability rating.

My rating on the trade is a 7 on drops down to $10 and a 6 on drops down to $8 (on a scale of 1-10 with the strongest probability rating being 10).

CHINA (Friday closing price 4.02)

CHINA has been in a strong downtrend since February when it has dropped from a high of 11.20 to last week's low of 3.75. In addition, since October the stock has dropped from 8.90 almost in a straight down mode. The downtrend that began in February seems to be running out of steam and the stock seems to have fulfilled its 3-wave pattern and should find strong buying support at this level as well as having a short-term correction upwards.

From Jan06 to Jul06 CHINA showed major support from 3.69-3.90 on 5 different occasions and that level must be considered, at least a strong support level. Resistance is found at 4.95 - 5.19 (4.95 on a daily closing basis).

With the 3 wave-down move possibly over, there are possibilities that CHINA has found its bottom and, after a period of base-building, could generate an up-trend thereafter. The most likely scenario, though, is a trading range between 3.90 and 4.95-5.19 over the next few weeks or months. Should the stock be able to close above 4.95, on a daily closing basis, a move up to the $6 would be probable. At this moment, though, that scenario is not likely for the short term.

Purchases of CHINA at 3.97 and placing a stop loss at 3.63 and an objective of 4.95-5.19 will offer almost 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).

There are a couple of stocks that I would like to mention as possibly good trades if the right scenario should occur. Ask me about them if you are interested:

KO short
SNDA long
NUAN long
FCEL long