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Issue #55 
January 20, 2008 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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| Indexes breaking supports but severely oversold!
DOW Friday close at 12099
The DOW had a strong down week giving up over 500 points from last Friday's close. The DOW has now come down over 2200 points from the high of 14198 made on October 8th and has yet to give any indication that the movement down is slowing. Over the past few trading days the intra-day rallies have been limited and heavily sold by the bears.
With Friday's drop, the DOW has reached a very important support level of support, around 12000. The 11953 (12050 on a daily closing basis) is the last bastion of strong chart support and if broken, the index could drop another 1200 points to 10800, before reaching the next support level of consequence on the chart.
Support on a weekly basis is/was at 12110. The close at 12099 does suggest a break of the weekly support but in the DOW, a close 10 points lower cannot be considered a true break. The lowest daily close since March of last year is 12050. At this time, that level has not been broken yet. Resistance will now be decent at 12350, strong at 12500, and major at 12743. The 100-week MA at 12400 will also act as resistance, especially if the DOW is planning to go lower.
If the DOW is able to hold its support level a rally would be likely as the market is oversold and sellers are looking to take profits. Nonetheless, unless the rally is based on some fundamental change or hard news (such as the interest rates being slashed at least 1/2%) the sellers would continue to have a close-by objective to shoot for and the pressure would continue to be strong on any new rallies.
In looking at the chart and evaluating the action of the past two weeks, the probabilities favor a break of support next week. The buyers have had no strength or ability to generate a lasting rally all this week and its unlikely the sellers will give up with the objective so close in hand. Such a break, though, could be a short-term blessing in disguise for the buyers as any reversal after a break of support, if it were to happen, would generate stronger buying due to the failure-to-follow through principle.
At this time, it is impossible to say whether the level of support will hold next week or not. I can say, though, that many of the stocks that had been under strong pressure recently failed to react negatively on Friday. This could be an indication that the stock market is near at least a temporary bottom.
Based on the previous drop from 13563 down to 12502 (1061 points) and using the corrective rally high of that drop up to 12931, a case can be made for a drop down to 11870 as an objective on the downside. Using a previous range of correction to determine the length of the next one is not exact chart science, but simply a method for determining at what point the drop may generate some general buying.
NASDAQ Friday Close at 2340
The NASDAQ closed Friday at the same price from which the index broke out from a 6 month correction back in 2006. The 2343 level, on a weekly closing basis, was a major top originally made in March 27th 2006 and tested on two occasions through May 1st before correcting back down to 2020 on July 17th of the same year. On October 9th, 6 months later, the NASDAQ broke above that major resistance level and closed at 2357. One year later, almost to the day, the NASDAQ made a 7-year weekly closing high at 2806. It is now back to the same level that generated that major rally. Previous high closes are normally not considered major support but on occasions levels of importance such as this one is, could become a stopper.
Friday's weekly closing price at 2440 might hold up when compared to next week's close, but it is important to note that intra-week trading ranges do not affect weekly closes. This means the index could trade substantially lower during the week only to rally by next Friday to close above this past Friday's close.
On an intra-week basis, there is no support level of consequence under 2332 until the 2000 level is seen and therefore the index is at great risk of continuing the strong recent downtrend, should it break substantially below Friday's intra-day low of 2323. The objective of the break of the neckline on the head & shoulders formation is at 2262. A drop to that level is not only possible but likely probable. Resistance will now be found at 2404, a little stronger at 2458, and major at 2531.
Having closed on such a weak note last week will not inspire confidence in the buyers to support aggressively the previous major high level at 2343 unless there is some fundamental reason to do so. I read this weekend on Yahoo Finance that positive earnings reports, due to come out this week, are not likely to offer much support and therefore another catalyst is likely necessary to stop the panic selling that was seen this past week.
Much like with the DOW, the sellers in the NASDAQ will probably go for the break of support to assert their strength and then probably begin a short covering rally thereafter due to the oversold condition of the index.
S&Poors 500 Friday close at 1325
The SPX has a chart much like the NASDAQ as the index has reached the area at 1325 which had been of major resistance prior to the breakout on September 26, 2006. The break above that resistance ultimately took it to make new all-time highs at 1576. The index is now back at that same price and if the level is broken, would negate the last 16 months of strength.
The objective of such a break is difficult to predict but the SPX has also broken the neckline of a head & shoulders formation that has, as an objective, the 1260 level.
There is no visual support on the chart, other than the previously important major high at 1325, until the 1237 and 1223 levels are reached. Resistance at this point is virtually non-existent until 1389 and 1407 are reached. Using the previous breakdown down at 1374 it can be said that level will act as strong resistance as well, should a rally occur.
In looking at the weekly chart of the SPX, and going back to the year 2000 when the index made a previous all-time high at 1555 and got into a downtrend thereafter, I can see strong supports within the downtrend at 1305, 1254, and 1234. In each of those cases, the index managed a corrective rally of about 90-120 points. The only difference I see in the chart is that this particular break in the SPX is much faster and stronger than the ones back in the year 2000.
It is also important to note that back in the year 2000, none of the previous major highs on the rally up to 1555 were able to act successfully as a support base when the index starting dropping. In this case it means that the 1325 level, a major previous high, is also unlikely to hold up and act as a support base.
It seems probable that at some point this week the indexes will bottom out, at least temporarily, and stage some form of rally. With many stocks showing some signs of life to the upside it is probably a harbinger that the downside trend is beginning to falter. With the likelihood that the remaining support levels will break this week, it is tough to predict exactly where the indexes will stop their fall. Nonetheless, the objectives given with the break of the necklines of the heads and shoulders formations, does give a clear projection of lows that could be seen and short-term bought if reached.
It is also probable that anticipation of what the Fed will do will help prop up the indexes at some point this week.
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Stock Analysis/Evaluation
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CHART Outlooks
Purchasing stocks this week needs to be done with great care and only in those stocks that show the potential for a 4-1 risk/reward ratio within a bear market. The longer-term probabilities still favor much lower prices in the indexes overall. The type of a break the indexes have experienced (almost straight down) does not support a trend change right now unless a major change of fundamental appears (unlikely to be seen). Selling rallies will continue to be the preferred trading strategy of the big professional traders until such a time the stock market has built strong and enforceable support levels. Stocks with potential for short term upside moves as well as stocks that have shown resiliency in the face of the strong downtrend in the indexes are the way to go this week.
PMCS (Friday Close at 5.09)
PMCS is a strong candidate for a bounce at these levels as the stock is trading near a couple of 5-year support levels of consequence. During the last 3 months PMCS has dropped from a high of 9.83 to a low seen on Friday at 4.99 and has shown that 10 out of the last 13 weeks and 11 out of the last 16 trading days have ended up in the red. The stock is severely oversold and reaching support levels of consequence. A short covering rally is expected and overdue.
Support is very strong in the 4.64-4.78 level (4.93-5.00 on a daily closing basis). The 4.64 intra-week low was seen on Feb03 and the 4.78 intra-week low in July06. On both occasions, reaching that level of support generated an immediate rally up to the $7 level within 5 weeks. Resistance is very minor at 5.73 but then absolutely nothing until the 7.00 level is reached. Over the years the 7.50 level has become a major pivot point in this stock and is a likely objective should the stock hold support.
Purchases of PMCS between 4.85 and 5.00 and using a stop loss at 4.58 and an objective of 7.00-7.50 will offer a risk/reward of 5-1 or better.
My rating on the trade is a 7.5 (on a scale of 1-10 with the strongest probability rating being 10).
NKTR (Friday close at 7.15)
NKTR is a stock that for the last 20 months has been taking on the chin. The stock, during that time, has been in a strong downtrend and has fallen from a high of 23.20 to a low of 5.12 seen back in November. Over the past 2 months, though, in spite of the strong weakness in the indexes, NKTR has actually been busy building a strong support base and has managed to start what looks to be a potential up-trend.
NKTR does have a very strong support level going all the way back to 2002 between 4.50 and 5.02. With the recent drop down to 5.12, it can be said the level has been tested successfully. Since that low and during the past couple of months the stock has been trading consistently between 6.20 and 7.50 in spite of strong weakness in the indexes, and now looks poised to break above resistance and go to the next level of resistance above.
The main reason for the recent strength in the stock goes back to November 13th when a news release came out stating that Pfizer was forced to cede control of a Diabetes drug inhaler and pay NKTR a total of $135 million in damages. The stock gapped up from 5.82 to 6.08 and has since shown considerable chart strength in the face of a weakening stock market, a base building process that now has sufficient chart points that professional traders can feel comfortable in buying , as well as what seems to be a strong probability the downtrend is over and an up-trend is ready to begin.
There is strong support now between 5.98 and 6.20 based on all the trading done in November and December. On a more recent note, this past week when the indexes were dropping, NKTR was able to hold itself above 6.82 and that price level now needs to be considered a good support as well. On the upside the resistance has been quite strong at 7.50 but there are now three tops at that price making that level likely to be broken. Above 7.50 there is no resistance until the 9.39 is reached.
Based on what could be continued weakness in the indexes in the first part of the week, it is possible the stock will get back down to the 6.82 level of support.
Purchases of NKTR at 7.00 or below and using a stop close only stop loss at 6.25 and an objective of 9.39 will offer a risk/reward ratio of over 3-1. This seems to be a high probability trade.
My rating on the trade is a 8.5 (on a scale of 1-10 with the strongest probability rating being 10).
ELN (Friday closing price 23.60)
ELN is a stock that has been going against the downtrend in the indexes but reached a major resistance level last Monday at 25.90 and has begun to sell off. ELN is a stock that back in Feb05 dropped from a high of $29 all the way down to $3 and has since been in a strong up-trend over the past couple of years that has taken it back to a high of 25.85 made last week. ELN did give several failure notices during this last rally that have turned the stock into a likely sell.
The first sell signal given was the failure of the stock to close the weekly gap left back in 2005 up at 26.50. ELN had built a very evident flag formation that had a high of the flag at 24.90. When the flag was broken with the rally up to 25.85, the stock should have not only closed the gap but rallied up to the 28.13 level. The failure to rally and subsequent close below the top of the flag is the second sell signal given. The last but also significant chart clue, is that back in July04, ELN rallied up to 25.90, on its way to a 5-year high at 30.25, but corrected down to 16.45 before being able to accomplish the new high.
Currently support is quite strong at 22.00-22.20, both from a couple of previous low daily closes as well as from the 100-day MA. Stronger support is found at 20.93 and then nothing of consequence until 17.70 is seen. The major support is at 16.37 as well as the possible objective of this trade. Resistance should now be strong at the previous top of the flag at 24.90 and then at the recent high at 25.85.
Sales of ELN between 24.74 and 24.90, using a stop loss at 26.00 and an objective of 16.37 will offer a risk/reward ratio of over 7-1. This is not a trade you will likely be able to do in the first few days of the coming week. It will likely require a rally in the indexes to be able to get the price back up near 24.90.
My rating on the trade is a 7.5 (on a scale of 1-10 with the strongest probability rating being 10).
CLDN (Friday closing price 8.49)
CLDN, much like NKTR, has been able to rally during the past few weeks in spite of the weakness in the indexes. The stock managed to fall from a high of 18.22 in August to a low of 6.56 in November. Since then, though, the stock was able to generate a rally back up to 9.56 and also begin to build what looks to be a support base from which to generate further rallies. In addition, the drop down to 6.56 broke below a 4-year low at 7.02 but there was no follow-through to the downside, making the subsequent rally into a failure-to-follow-through event. Such action is usually a statement that there is no further strength to go lower.
Support in CLDN is down at 7.80 (minor), 7.50 (strong), 7.13 (very short-term important), and 6.50 (major). Resistance is at 9.17 (minor) and at 9.50 (strong). Above 9.50 there is no resistance until 10.90 and above that nothing until the $15 level is seen. The resistance up at 9.50 seems to have a high probability of being broken, as there are three highs up at that price. Triple tops have a high degree of probability of being taken out. With the indexes likely being under pressure at the beginning of the week, there is a good possibility that CLDN will trade back down near the 7.50 level, at which time should be considered as a purchase.
Purchases of CLDN between 7.50 and 7.80 and using a stop-loss at 7.03 and an objective of 10.90 will offer at least a 4-1 risk/reward ratio.
My rating on the trade is a 6.5 (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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BEAS was offered a buyout by Oracle at $750 million. This caused the stock to rally up to the 18.50 level and stall at that price. Chart evaluation is useless at this point until the offer becomes a purchase. No other comment is possible. NTES, on Friday, did get down to the last thread of support at 18.46 but did not break below. Nonetheless the stock did close on both Thursday and Friday below the 100-day MA at 18.90 as well as below the 20 and 100-week MA's and those events likely signal further breakdowns. Below 18.48 there is no support of consequence until the 16.56-16.81 level is seen. A gap still exists between 15.50 and 15.85 that could come into play should the stock break down. Resistance continues to be major up at 19.63. EPIC broke down below the support level at 10.48 (10.55 on a daily closing basis) on the daily chart and gave a sell signal. In using the weekly charts, there is evident support between 9.56/9.66 and 10.00. Any close below 9.56 would be strongly bearish and would likely generate a drop down to the 6.00 level, as there is absolutely no support below that price. Resistance should now be 10.55 on a daily closing basis. If the break of support is for real, the stock should drop down below $10, early in the week. A gap was left between 11.14 and 11.03 and should the stock try to rally that level should also act as resistance. The daily chart looks very weak but there are strong levels of support down to 9.56 on the weekly chart. JNPR should continue the downtrend while the indexes are falling. On Friday, the stock closed lower than the previous recent low close a 26.60 and signals that further drops are likely. The 28.50 level is now an established major resistance level and stops should be lowered to 28.60. There is no support on the chart until 24.60 is reached. In order to find that support you have to go back to June 2005 to find it. Using this year's chart, there is no support until the $20 is seen. The stock is likely to continue to head downward MSFT is now showing a strong double bottom at the 32.50 level that helped generate a good rally this past week up to 34.00 and closure of the gap the stock had left on the way down. On a daily closing basis, any close above 34.00 should be considered short-term bullish and the short position liquidated. Any close below 32.50 would be quite bearish and could generate a drop down to the $30 level. CHINA, this past week, broke below the major support level at 3.75-3.90 with a drop down to 3.63 but then the stock generated a strong short covering rally that took the stock back up to 4.25 in a jiffy. The action seems to show that the stock does have good buying support down at these levels. CHINA did move back down on Friday to test the 3.63 low with a drop down to 3.70 and if able to rally back up above 4.25 will give a mini-buy signal that will be supported with a strong re-test of the major support level left in the stock. A break below 3.63 will be very negative and should generate a drop down to 3.09. A move above 4.25 will be quite positive and likely to generate a move back up to the 5.19 level of resistance.
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1) MSFT - Shorted at 34.70. Stop loss lowered to 34.58. Stock closed on Friday at 33.91.
2) JNPR - Averaged short at 29.75. Stop loss lowered to 28.60. Stock closed on Friday at 26.50.
3) EPIC - Shorted at 11.95. Stop loss now at 11.37. Stock closed Friday at 10.36.
4) BEAS - Averaged short at 16.655. No stop loss at present. Stock closed on Friday at 18.40.
5) CAT - Covered short at 62.84. Profit on the trade of $587 per 100 shares minus commission.
6) NTES - Shorted at 19.35. Stop loss at 19.73. Stock closed on Friday at 18.71.
7) NUAN - Purchased at 14.93. No stop loss at present time. Stock closed on Friday at 15.01.
8) RMBS - Covered short at 16.10. Profit on the trade of $532 per 100 shares (2 mentions) minus commission.
9) CHINA - Purchased at 3.93. Stop loss lowered to 3.57. Stock closed on Friday at 3.81.
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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