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Issue #56 
January 27, 2008 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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| Correction upward hit a wall?
DOW Friday close at 12207
The DOW had a wild trading week with an 840 point trading range from high to low. All support levels of consequence were broken on Tuesday, on an intra-day and intra-week basis, only to close the week with a higher close than last week. On a daily closing basis the DOW on Tuesday did make a new 15-month low by 80 points at 11971, but in general was able, on a closing basis, to hold itself above the 12000 level. The rally in the market was due to bold action by the Fed in lowering the interest rates 75 basis points. The action stemmed the negativity caused on Monday when all the indexes around the world tumbled strongly. By the end of the day on Tuesday, and again on the weekly close on Friday, no confirmation of the breaks of support was given, thus putting the bulls and the bears back on a battleground that has yet to be totally defined.
Even though the action by the Fed was bold and did stem the bearish tide, many economists see the action as a door opener to rising inflation and larger problems down the road. In addition, the lowering of the Fed rate was not anticipated to be done until the end of the month, and was seen by many as a panic driven move by the Fed, thus raising the thought that the credit crisis may be worse than many have expected.
Even though the close on Friday was above the support level at 12099-12110, it was not high enough to create confidence in the market that the worst is over. In addition, Friday ended up being a classic reversal day with a higher high, a lower low, and a close below the previous days low. Such action will weigh heavily on the index this coming week. A close above 12276 would have given the bulls a bit of confidence even though it was considered, at best, a minor resistance level on a weekly basis. With the failure to close above that level, the index is again on the defensive and looking weak.
Having traded as high as 12485 intra-day, the bulls wanted the close to reflect that the index still had some strength. Instead, the DOW gave up 278 points, measured from the high of the day, by the closing bell. Not only was the DOW not able to close above a very minor resistance level at 12276 but gave a reversal signal and continued to close below the 100-week MA at 12413. The lack of continued buying support suggests the bears are still firmly in control and that the correction up this past week was simply a knee-jerk reaction caused by the Fed, to a very oversold condition.
The intra-day high at 12485 was a re-test of a strong resistance level at 12481 and if the DOW is unable to break above it on Monday, the level will be confirmed as a successful re-test of a strong resistance level. Support is very evident between 11971 and 12050, on a daily close. If the DOW is able to continue to close above 11971 during the week and after the Fed announcement on Wednesday, it is likely that a new attempt at 12481 will be made. If not, a re-test of Tuesday's intra-day low at 11640 level is likely. In addition, the possibility of continuation of the downtrend and new lows being made would also be strong.
It is evident that the DOW is on the defensive and continues to need more fundamental news to prevent the bears from causing a new collapse. Already there is anticipation of a further rate cut by the Fed of 50 basis points to come on the 30th. Such anticipation is a double-edged sword as the risk is run that even if the Fed lowers interest rates further, it might already be "in the market" and therefore not generate much new buying. On the other side of the coin, if the Fed does not lower interest rates this week, it is likely the DOW will take that negatively and simply continue the downtrend with a possible objective of 10000 as the target.
On Monday it is likely the DOW will continue to be under pressure, barring any positive news overseas. Monday's first objective to the downside will be 12022. Should that level of support break, you will find support again at 11911 and then stronger at 11707. Resistance will be seen at 12300 and then again at 12400.
NASDAQ Friday Close at 2326
If one were to decide what to do with the indexes based on the close of the NASDAQ on Friday, it would be that the indexes are heading lower. The NASDAQ was not only able to close at a new 15-month low but below an important support level of consequence.
The 2343-2331 had to be considered a pivotal point for the index. 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. On Friday the NASDAQ closed below that breakout level and if unable to generate a rally on Monday and close back above that level (give a failure-to-follow-through signal), it is likely the downtrend will continue throughout the week, and perhaps in a strong manner.
There is some decent support at 2235 (previous lows back in February06) and again at 2200 (this past week's low). Below that, though, there is nothing of consequence until 2020-2065 is seen. Resistance will now be at 2367-2376 on an intra-day basis and daily closing basis and 2331-2343 on a weekly closing basis.
Based on the close on Friday as well as the expectation of the Fed further lowering interest rates on Wednesday, it is unlikely that the NASDAQ will drop below the 2235 level for the first few days of the week, even if the weakness continues. The 2395-2408 level, on an intra-day basis, has been a major pivot point for the index since Nov06. The fact that the index tested that level intra-day and then fell back and closed below the closing support at 2331 is strongly bearish and singles out the fact that it's very unlikely now that Friday's high at 2408 will be taken out anytime soon.
The chart suggests that lower numbers will be forthcoming from now on and that the rally this past week was not only short-lived but defining for the mid-term (2-3 months at least). The chart also suggests that the downtrend will continue with 2000 as the downside objective.
S&Poors 500 Friday close at 1331
The SPX chart continues to look very bearish. This past week's rally failed to accomplish anything of consequence to the upside and the weekly closing price was barely higher than last week's close. The SPX has continued to trade much below the closest previous daily closing support level at 1384 and the index shows minimal support underneath.
On Friday, the index rallied up to the previous low of consequence at 1364. This was the support it broke below on the way down. The level was re-tested intra-day but before the day was over, the SPX had fallen 37 points from the high.
There are no levels of support of consequence near-by except the lowest intra-day low made last week at 1270 as well as the lowest daily closing low made two weeks ago at 1311. Resistance, on a daily closing basis, will be very strong at 1352 and support at 1311. Any daily close above or below either of these two levels will generate some follow through. A close below 1311 will be particularly damaging, as it will mean the downtrend has re-started. There is absolutely no support of consequence below 1311 until the 1223-1238 level is seen. Should the index be able to close above 1352, it is likely that a rally up to the 1387 level, on a daily closing basis, will ensue.
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, there were 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. With the 100 point move the SPX sustained over the past week, it can be said the correction upward is over and a new low will be made. With the drop down to the 1270 level last week, a new low could take the index all the way down into the major support between 1220-1234.
It seems probable that the upward correction seen this past week was caused by the Fed action alone and that the downtrend is still very much in effect. With the indexes failing to do enough to the upside to generate further buying, it seems the Fed action has not been sufficient to generate consistent investor confidence. With further Fed action already being anticipated this week, should it come, it is likely the market will react initially positively but then resume the downtrend as there will be no further anticipation of Fed activity for at least another month thereafter.
The charts seem to point out that the weakness and gloomy scenario has not gone away and further Fed action is not likely to change the feeling much. At this time it seems unlikely that any consistent rallies will occur and the likelihood of new lows being made continues to be strong.
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Stock Analysis/Evaluation
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CHART Outlooks
This week will be very tricky as it is expected the Fed will lower interest rates an additional 50 points on Wednesday. The fact that it is "expected" makes trading the stock market tricky, before Wednesday afternoon, as the reaction to the Fed action is totally unpredictable at this time. Certainly if the Fed does not lower interest rates further, the likelihood of the indexes resuming their downtrend is strong. The action this past week did not show any inherent strength in the indexes and therefore putting on short positions will continue to be the way to go. Nonetheless, due to the uncertainly of the reaction to Fed action, one has to be nimble and use clearly defined stop loss points just in case the Fed action is considered bullish.
NTES (Friday Close at 18.61)
NTES broke below an important weekly support level at 19.00 a couple of weeks ago and broke below an important daily closing support level at 18.67 this past week. In both cases the breaks have now been confirmed and the stock seems to be heading lower.
The rally this past week seems to be a perfect opportunity to put on a short position as the stock has rallied intra-week and is trading at or near important resistance levels. On Friday NTES rallied back up to the breakdown point trying to reverse the weekly sell signal given last week, it failed to do so and confirmed the break. In addition, the rally gives a good opportunity to enter the short side with a very evident limitation of risk.
Resistance on a weekly closing basis is strong between 18.77 and 19.11. There have been 3 prior weekly closing price highs between those two levels as well as two previous weekly closing lows. On a daily closing basis resistance is found at 18.67 (2 previous important low closes) and at 19.24/19.29 with two previous high daily closes. In addition, the 100-day MA is presently at 19.00 and the 20-day MA at 18.89. As far as support is concerned, the closing low on Wednesday at 18.00 is the only support close by. There is decent support, using the daily closing chart and going back a few years, down between 16.80 and 16.97. Nonetheless that support is not recent. There is some minor support down at 16.47 but If that level breaks the next area of strong support is not until 15.25, on a daily closing basis.
If NTES fails here and begins a downtrend it is likely that a very evident gap between 15.50 and 16.12 would be the objective of the bears. There is some strong support down at 15.00 and using a downtrend scenario that would be a very likely objective as well. In looking at the weekly chart, the probabilities of the stock now getting into a trading range between $15 and $20 are high.
Sales of NTES at Friday's closing price of 18.61 and up to 19.00 and using a stop close only stop loss at 19.35 and an objective of 15.00 would give a risk/reward ratio of at least 5-1. After Wednesday, the stop loss placing will likely be lowered and the risk/reward ratio increased strongly.
My rating on the trade is a 7.5 (on a scale of 1-10 with the strongest probability rating being 10).
ITG (Friday close at 44.15)
ITG is a stock with a potential home run scenario on the short side. ITG started a major up-trend in July04 from 12.00 that culminated on May06 at 57.10. After reaching that lofty goal the stock retreated over a period of a few weeks and from Oct06 to the present time has been trading in a range between $36 and $48, on a daily closing basis. Just 12 trading days ago ITG soared up to the 50.35 level but hit a major resistance level set in Oct06 and proceeded to gap down and drop to 39.11 just two days later. In looking at the weekly chart going back 5 years, ITG has been building a wide pennant formation and if the indexes take a tumble, this stock could break its major support at $36 and drop down aggressively.
Even if the break of support does not occur, the chart seems to point toward a move down to support and potential for a good risk/reward ratio trade on the short side. It must also be mentioned that a breakout above $48, on a daily closing basis, could generate an aggressive move to the upside.
Using the weekly as well as the daily charts, the 45.92 intra-day level seems to be strong resistance (45.00-45.23 on a daily closing basis). In addition, the 44.83-44.97 level, on a daily closing basis as well, was the breakdown point on the stock. In addition the 20-day MA is currently at 45.21 and the 50-day MA is at 44.86. In simple words, the stock is butting heads with a major resistance level at this time and not being successful in breaking it down. On Tuesday of this past week, ITG got down as low as 38.00 and there is presently no support of any consequence until it gets back near to the 39.11-40.73 area. Using the weekly chart, the stock has been showing consistently lower high weekly closes and higher low weekly closes and therefore a pennant formation seems to be in effect. The last weekly close on the downside, in the pennant was at 40.73.
This is evidently a very volatile stock but the chart parameters are clearly defined. Such a chart formation offers much trade value. With the indexes under strong pressure and more likely to resume the downtrend than stage a strong rally, ITG offers not only a likely profitable trade but a chance of a home run should the 35.44 level get broken.
Sales of ITG between 44.62 and 45.06 and using a stop loss order at 45.40 stop close only and a minimum objective of 40.73 will offer a 5-1 risk/reward ratio. Possible drops all the way down to 35.44 could happen should the indexes show further weakness. The risk/reward ratio could climb up to 12-1. Should the 35.44 level get broken on a closing basis, the risk/reward ratio would skyrocket.
My rating on the trade is a 6.5 (on a scale of 1-10 with the strongest probability rating being 10) only because this is a volatile tech stock and the results of the expected Fed action are still up in the air. If that weren't the case the rating would climb to 7.5.
TASR (Friday closing price 10.48)
TASR is a stock that broke out above a major resistance level at 11.38 in July of this past year and rallied all the way up to the 19.10 level. Over the past few months the stock has traded between $13 and $18 but in December TASR started to move down in a consistent basis and dropped all the way down to 8.16 this past week. In the process, TASR negated the breakout above 11.38 and has now gotten back into a likely trading range, in effect prior to the breakout, between 7.50 and 11.38.
TASR dropped strongly to the 8.16 level on Tuesday but has since generated a rally up to 10.80 and a re-test of the previous breakout level. The stock gapped up on Friday and rallied up to 10.80 but gave some its early morning gain back to close near the low of the day. Because of the gap opening it is possible that TASR will generate a bit more follow through to the upside and reach above the 11.00 level and into the major resistance area.
TASR has very strong resistance, on an intra-day basis, starting at 10.65 and up to 11.38. On a daily closing basis the resistance is better defined between 10.91 and 11.02. Support is decent between 8.99 and 9.45 but a break of that level will likely generate a move down to the major support level at 7.50.
Sales of TASR between 10.64 and 10.90 with a stop loss at 11.48 and an objective of 7.50 will offer at least a 4-1 risk/reward ratio.
My rating on the trade is a 7 (on a scale of 1-10 with the strongest probability rating being 10).
AOB (Friday closing price 9.09)
AOB has an interesting chart for a buy purchase that is based on a negative scenario. AOB has a very evident double top on the weekly chart up at the 14.20 level. That formation should have generated a lot of weakness, especially with the breaking indexes, and yet the weakness of the chart has been quite subdued. The stock has not even gotten near its previous major low at 6.83 in spite of the fact the indexes have broken all their major supports.
Last week, when the indexes broke down, AOB dropped as well and went down to a low of 8.18. That low connects back to a major low made in March07 at 8.42 as well as another important low made on June07 at 8.13. In both of those cases, the low generated a $2 or $3 dollar rally. Using the weekly charts, AOB seems to be showing a possible inverted head and shoulders formation with the left shoulder at 8.42, the head at 6.83 and the right should at Tuesday's low of 8.18. The neckline is the double top at 14.19/14.48 area.
AOB did gap down on Tuesday but quickly closed the gap on Thursday. A re-test of the 8.18 low is anticipated this week but if the low holds up, will be considered a re-test of support and will generate a rally upward.
Support is very strong at 8.13-8.18 and then again decent at 7.63, and major at 6.83. Resistance is evident at the 9.94-10.06 level, not only from a couple of previous highs at that price but also from a falling 20-day MA currently at 10.13. Above 10.06 there is no resistance of consequence until the 11.79-11.85 level is seen.
With the support level so clearly defined and the inverted head & shoulder formation in place, added to the surprising strength of the stock in a down index market, AOB seems to be a trade with decent probabilities of a move upward.
Purchases of AOB between 8.28 and 8.35 with a stop loss at 8.03 and an objective of 9.94 will offer a risk/reward ratio of 5-1. With the possibility of an inverted head & shoulders formation in the weekly charts, this trade could ultimately turn into a home run. Of course, if the home run is to come, it is likely to take several months to finalize.
The trade is most attractive only because the risk is so small and the profit potential short-term clearly defined. Add to that the potential for a home run in the near future, it makes this trade a must-do.
My rating on the trade is a 6 (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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NTES tested the breakdown point at 18.67 (on a daily closing basis) on Friday and failed to close above it (closed at 18.61) even though it did break above the 19.00 level intra-day. The 19.04 high was a re-test of the 100-day MA and with the failure to follow through to the upside, as well as close below 18.67, should be considered a bearish sign. The weekly charts have confirmed a break of the 20 and 100-week MA's with a second weekly close below those lines, and a close next Friday below 18.32 would break the 50-day MA as well. The rally on Friday should be the last and downside movement should resume from these levels, if the break of support is for real. Objective continues to the 16.50 and perhaps even 15.50. Even though the rally generated a $2 move up this week, the chart continues to look quite bearish. CAT had a wide range this week between 59.60 and 67.75. The rally of Friday went up to exactly the 20-day MA as well as the previous support level and breakdown point at 67.75. CAT failed to break the resistance level and dropped almost $2 before the day was over. There is no support of consequence until the 62.47-62.87 level is reached and it is likely the stock will be heading there in the first part of the week. That level of support should hold the stock up until the Fed announces whether they are further lowering interest rates or not. Should the stock go below 62.34 intra-day, the likelihood of a drop back down to the 60.00 level increases strongly. Any close above 67.75 would be bullish for the stock. JNPR had a very bullish earnings report come out on Thursday and though the stock gapped up it failed to even reach the resistance level at 28.00 and ended up the day in the red. Such action suggests more downside is probable. There is some minor support at 24.72 on a daily closing basis but below that, the next level of support would be the 100-week MA at 22.69. Major support on the chart is not seen until the 20.00 level is reached. Based on the negative action on Friday, it seems likely the stock has that target in mind. SNDA dropped all the way down to 23.80 in the first part of the week and then generated a rally to test the breakdown level, on a weekly chart, at 29.45. In addition, the stock tested the 20-day MA as well as the 50-week MA at 30.20 but failed to reach the strong resistance at 30.63. The close on Friday was below the 29.45 level (closed at 29.35) and if next week's close is again below 29.45 it will be confirmation of a successful re-test of the breakdown level and put the stock on the defensive and trading lower for the next few months. If that happens, a likely trading range for SNDA would be between $21 and $30. There is some immediate support at 27.80 and then a bit more at 27.00. Any close below 27.00 would likely push the stock down toward the 24.31 level. A close above 30.63 would be bullish and send the stock up to the 33.24. Based on the action on Friday, the rally scenario has a low probability of happening unless the stock indexes are able to generate a decent rally. CHINA was able to give a mini buy signal on Friday with a close above the 3.97 and 4.06 levels. It did not break above the 20-day MA or close above the 4.17 level which would have been a strong buy signal. Nonetheless, the weekly close above those two levels suggests that the downside is probably over and that the stock will either trade sideways or higher from here on in. Resistance is found at 4.79 and very strong resistance at 4.95. Based on the close on Friday a rally up to 4.79 seems probable. Drops as low at 3.82 can still occur but unless the stock closes below 3.64, it can be said the downtrend is over. Because it is likely the indexes are heading lower, at least for the first part of the week, CHINA could head down to 3.82 first. I would add positions at that price. FCEL has done much during this past week to signal that the downside is over and yet the stock only closed a few ticks above a long standing pivot point area between 8.32 and 8.52 with a close at 8.61. Such a near-by close is indecisive and does not clarify in what direction the stock is heading in. Further action this coming week is needed to supply a decisive direction for the short-term. A weekly close above 9.10 is needed to confirm the stock is heading higher. A daily close below 7.88 will generate further selling and a likely drop down to the low 7's. On Friday FCEL closed exactly at the 100-week MA and therefore next week's close will likely determine the short-term direction of the stock. PMCS had a wild week but in the end nothing was determined regarding the short-term direction of the stock. The earnings report came out and it was relatively bullish and yet the stock sold off immediately thereafter leaving the chart still undecided. The 5.00 level is the crux of the matter as that is a level that has been important to the stock since 2003. The stock on Friday, after the report came out, rallied up to the 20-day MA at 5.74 but then reversed itself and had a classic reversal day with higher highs, lower lows, and a close below the previous day's low. Nonetheless the close was at 4.98 and to the long-term weekly chart no damage was done. Some follow through on Monday is expected and a drop down to 4.70 could be seen. Nonetheless, any further weakness, on a daily closing basis, will place PMCS in a negative position as any daily close below 4.95 will be considered bearish. It is evident that now that the earnings report is out, some form of decisive direction will be seen this coming week. I have no clue at this moment what that will be but swift action in either direction should be exercised. A close below 4.95 will be bearish but a close above 4.98 will likely be bullish. Whichever way it goes I am planning to either liquidate the position or purchase more shares.
WIND continues to hold supports but has been unable to generate a breakout and/or buy signal. On a daily closing basis the ranges keep shrinking with a close above 8.53 giving a mini buy signal as well as a break of the 20-day MA. A daily close above 8.68 will generate a strong buy signal. Support on a daily closing basis is 8.40 and then 8.15. A close below 8.40 will likely send the stock into a sideways trading range for a week or two. Major support continues to be 7.88 on a daily closing basis. CLDN has not been purchased yet but I did want to put a comment on it as I am still very bullish on the chart. The possibility of a drop down to 7.50 has diminished but has not gone away yet. With the uncertainty of the indexes still playing a "monkey-wrench" role. Any daily close above 9.27 will be a strong buy signal but already the stock is trying to give mini buy signals by pressing previous daily high closes at 8.93 and 8.99. If the stock does break out I will be buying the breakout but if the indexes drop, especially after the Fed action expected on Wednesday, I will wait for the 7.50 level to be seen.
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1) MSFT - Covered short at 32.00. Profit on the trade of $270 per 100 shares minus commission.
2) JNPR - Averaged short at 29.75. Stop loss lowered to 28.60. Stock closed on Friday at 26.50.
3) EPIC - Covered short at 10.72. Profit on the trade of $123 per 100 shares minus commission.
4) BEAS - Covered short at 18.22. Loss on the trade of $314 per 100 shares (2 mentions) minus commission.
5) CAT - Shorted at 67.72. Stop loss order at 68.65. Stock closed on Friday at 65.93.
6) NTES - Shorted at 19.35. Stop loss at 19.73. Stock closed on Friday at 18.61.
7) NUAN - Purchased at 12.85. Averaged now at 13.89. No stop loss at present. Stock closed on Friday at 16.04.
8) SNDA - Shorted at 30.12. Stop loss at 30.73. Stock closed on Friday at 29.35.
9) CHINA - Purchased at 3.93. Stop loss lowered to 3.56 stop-close only. Stock closed on Friday at 4.11.
10) WIND - Purchased at 8.32. Stop loss at 7.78. Stock closed on Friday at 8.44.
11) PMCS - Purchased at 4.72. Stop loss at 4.58. Stock closed on Friday at 4.98.
12) FCEL - Purchased at 7.16. Stop loss at 6.90. Stock closed on Friday at 8.61.
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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