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Issue #79 
July 06, 2008 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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| DOW Oversold and Nearing Levels of Strong Support - But not there yet!
DOW Friday close at 11288
The DOW showed follow-through to the previous week's drop of 630 points and closed out the week lower than last weeks close, thus giving indications there is more downside to come this week. On Thursday the DOW was able to generate a small rally after the unemployment figures came out as expected. Nonetheless, even with the rally amid an oversold condition, the index tried repeatedly to close above last week close, but in the end it was not able to do so. Such a failure means the recent downtrend has not yet found a temporary bottom.
The new earnings quarter begins this coming week and volatility is expected to increase as more news is brought into the market. With the index looking to determine a temporary bottom to the current downtrend as well as establish a new trading range, it is likely that two-way action with a bearish bias will be seen this coming week.
On an intra-day basis, support is major between 10666-10718. That area is unlikely to get broken any time soon as it was a major support from July 2005 to July 2006. On a daily closing basis, support is also strong, from 10960-11109. It is likely that upon reaching that level the first time, a bounce of some consequence will occur. On a daily closing basis, resistance is now going to be very strong at 11578 and on an intra-day basis at 11670 where the 200-week MA is currently located. The 11280 level, where the DOW closed near on Friday, is also a clearly defined pivot point that will likely become a small resistance level when the index closes below it.
In looking at the weekly chart, it seems likely the DOW will see a trading range this coming week between 11039 and 11335, even though in looking at the daily chart a rally up to the 11407 level is possible. Once the 11039 level is reached, a short-covering rally over the next 2-4 weeks up to 11670 is likely to happen. The charts seem to show that over the next 2-3 months, with most of the action leaning toward the lower end, a trading range between 10700 and 11600 will be seen.
For the coming week, barring unexpected good earnings reports, it is likely the DOW will be under pressure with a clearly defined objective of reaching the 11000 area. Once the bears are successful in reaching one of their downside objectives, it is likely that a short-covering rally will occur. The index is heavily oversold.
NASDAQ Friday Close at 2245
On a weekly closing basis, it is clearly evident that the NASDAQ got the brunt of the selling this last week as the index came down over 3%, whereas the other indexes closed out the week with a drop of only 1%. Such a change of recent trend, versus the other indexes, seems to belay the fact the indexes are likely reaching an area of support where the NASDAQ will no longer outperform the other indexes to the upside.
The NASDAQ did close out the week with a break of the 200-week MA and gave the same sell signal that the other indexes had given several weeks ago. The break of the 200-week MA does need to be confirmed next week with another close below 2316, but at this time that seems like a high probability.
On a weekly closing basis, the NASDAQ does show major support at 2212. That price was the weekly closing low in March. On a daily closing basis, though, there is strong support between 2175 and 2203, as there have been many daily closing highs and lows made during the past 4 years at those levels. Intra-day support is seen at 2155, as that was the intra-day low made in March. There is minor resistance between 2283-2290 (2264-2268 on a daily closing basis) and stronger at the 200-week MA at 2316. Major resistance will now be 2367.
Now that the NASDAQ has broken below a previous intra-day low at 2257, there is no support whatsoever until the 2200 level is seen. It is highly likely that a drop to that price will be seen this coming week. In addition, there is an open gap between 2201 and 2207 that is now a magnet for the bears.
Possible trading range for the week could be 2290-2200.
S&Poors 500 Friday close at 1263
The SPX did make a new 24-month weekly closing low on Friday by closing below the previous low close and support at 1288. In addition, the index confirmed the break of the 200-week MA at 1318 by closing below that line, two weeks in a row. The last time the index broke below the 200-week MA, back in 2001, the SPX dropped over 300 points, from 1264 to 965, in a period of 3 months. The chart scenario was different then, as there was no previous chart support to stop the fall, like there is now. Nonetheless, the previous break of the 200-week MA was an event that brought strong selling pressure on the index for several months.
On a weekly closing basis, strong support in the SPX is found at 1236-1245. The 1245 weekly closing low as seen back in October 1999 when the index fell from an intra-week high of 1420 to an intra-week low of 1234. In addition, in June 2006 the index had an intra-week low of 1219 and a weekly close at 1236. This level is considered strong support. On a daily closing basis, though, the same support level has shown closes as low at 1224. Should the index close below 1236, on a weekly closing basis, and below 1224, on a daily closing basis, there is quite a bit of congestion daily and weekly closes around 1180. Resistance is major up at 1320-1326 from the 200-week MA as well as from a previous major weekly close at 1326. On a daily closing basis, decent resistance will also be found between 1273-1280, not only from the recent break of that support but also from previous highs seen back in 2006.
Like the all the other indexes, the SPX finds itself in an oversold condition and nearing levels of support from which a small rally is likely. A drop down to at least the 1245 level is probable for this week. By the same token rallies up to 1273-1280 are almost as probable. Overall, though, it seems likely the index will get into a trading range between 1219 and 1290 for the next few weeks, or even perhaps couple of months.
It is now clearly evident, both fundamentally and on the charts that the downtrend has resumed. In looking at the probability of a three-wave scenario (this being the second wave) the probability of continuation of this week's drop is high and immediate. The objectives of the 2nd wave are still about 3% lower than where the indexes closed on Friday.
This coming week it is likely selling pressure will continue, as downside objectives have not yet been reached. Nonetheless, once those levels of support are reached, a short-covering bounce of some consequence is likely. Rallies, though, will continue to be aggressively sold so the main thrust of trading will be on the sell side.
It is important to note that this week launches the next quarter's earnings report period with AA being the first on Tuesday, after the market close. General expectations on earnings have come down dramatically and therefore some surprises are possible. Expect volatility and two-way trading to increase over the next few weeks.
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Stock Analysis/Evaluation
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CHART Outlooks
It is anticipated that this coming week the indexes will be under pressure and therefore most of the mentions this week are still short positions. Nonetheless, with the indexes in an oversold condition and reaching levels of likely strong support, trades on the short side need to be hand picked and if objectives are reached profits need to be taken immediately.
If the indexes accomplish their downside objectives this week, long positions will be offered next week.
ABB (Friday Close at 27.37)
ABB made a new weekly all-time high back in May with a rally up to 33.39 and above the previous all-time high at 32.08. Two weeks later the stock then gave a failure signal when it closed below 32.08, on a weekly closing basis. Since then, the stock has closed in the red 5 out of the last 6 weeks.
On the way up from 23.70 to 33.39 ABB generated a breakaway gap between 25.60 and 25.96 and a runaway gap between 26.89 and 27.03 that was closed this past week. With the closure of the first gap the breakaway gap is now a major objective and one that will likely be obtained shortly. In addition, the indexes are in a downtrend, the stock broke and closed below the 100 and 200 day MA's this past week, and a breakaway gap at 30.41-30.01 and a runaway gap between 28.21-28.12 have been generated. All of these factors put together seem to say that the likelihood of the stock heading lower is high.
Resistance is minor but evident at the gap area of 28.12. Stronger resistance will be found at 28.96 with a small previous high as well as a previous gap area of some importance at that price. Between 27.83 and 28.35 you will also find the 200 and 100 day MA's respectively. Minor support is seen at 26.50 and then a bit stronger at 25.84. There is some decent psychological support at $25 and then very strong support at 22.30.
With the indexes in a downtrend and not having reached their downside objectives yet, as well as the stock looking at an open breakaway gap about $1.50 lower than Friday's closing price, it seems that the short side of this trade is quite attractive.
Sales of ABB between 27.83 and 28.12 and placing a stop loss at 28.08 and having an objective of 22.30 will offer a risk/reward ratio of 4-1. If you want to play it closer to the chest you could place a stop loss at 28.22 (closure of the runaway gap) and have an objective of a drop down to at least the $25 level. Such a trade would offer a 7-1 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).
JNJ (Friday close at 65.12)
JNJ reached its all-time high in April 2005 with a high at 69.95. Over the past 3 years there have been 3 occasions where that high has been tested successfully with a high of 69.41 on Oct06, a high of 68.85 in Jan08 and the most recent high at 68.32 in May-8. On the other side of the coin, the stock has also been making higher lows during the same period of time with a low 56.70 in Oct06, a low of 59.77 in Jul07, and the most recent low at 61.17 in Mar06. It is evident that within the next few months a breakout or breakdown of that pennant formation will happen.
At this time the stock seems to be working toward the lower spectrum of that trading range. Since May 2nd when the 68.32 high was made, the stock has had lower highs and lower lows consistently and no signal that this short-term downtrend is over has been given yet. With the indexes under pressure it seems that JNJ has a bit more to go to the downside, with the possibility that if the indexes break down completely that this stock could offer a "home run" type of trade.
Resistance is very strong between the most recent high of 65.62 all the way up to 65.89. The 65.89 resistance level is one of consequence as that was the high back in 2002 that stayed untouched for 3 years thereafter. In addition, the 65.82 level was a major high last year in October and from April to June of this year has played the part of a major pivot point as well. Support is very strong at 63.55-63.72, minor at 64.54 and strong to major down at 62.00.
At this time JNJ is in a short-term downtrend that is being aided by the downtrend in the indexes. In addition, the stock just recently dropped down to 63.10 and was able to break intra-day below the strong support at 63.55-63.70 thus giving strength to the belief the stock could easily head back down to that level over the next few days.
With a very clearly defined and strong resistance level up between 65.62-65.89, a clear objective down to at least 63.70 and a short-term downtrend in place, JNJ seems like a high probability trade on the short side. The possibility of the stock breaking down below the bottom of the pennant formation at 61.17 is relatively good, depending on what the indexes do. If that happens, drops down to $55 would then be probable.
Sales of JNJ between 65.45 and 65.55 and placing a stop loss at 65.97 and having an objective of 63.55-63.70 will offer 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).
CMED (Friday close at 43.51)
CMED is a stock that reached an all-time high in February at 57.50 and then proceeded to drop within 10 days to 35.31 and within 3 months to 32.52. Upon reaching that 10-month low, the stock must have received a bullish report because it generated a 3-week rally that took the stock back up to the 49.82 level. Last week, though, the stock had a reversal week with higher highs and lower lows and came within 10 points of it being a "classic" reversal week as the stock was only able to close 10 points higher than the previous weeks low. The reversal seems to indicate that CMED has found a resistance level of consequence and now needs to go back down to re-test the lows as well as build a new support base from which to attempt a new rally in the future.
CMED did get back down to the 200-day MA on Friday and was able to close above that line thus increasing the possibility of a rally at the beginning of the week. If the rally does occur, the resistance above the stock is quite strong and should be used to institute a short position that offers an excellent risk/reward ratio.
Resistance of consequence is found between 45.60 and 46.30, as that level has proven to be a major pivot point since December of last year. On 13 different occasions that price range has shown itself to be an important high or an important low and with the recent break below that price, will now act as strong resistance. Support is minor at the 200-day MA at 42.75 and again minor at the 20 and 100 day MA's which are currently both at 41.75. Stronger support is seen down at the psychological $40 level where the 50-day MA is currently seen. Should that level get broken, strong support, on a daily closing basis, is found at 36.50. Strong intra-week support and possible objective of a short position will be found at 34.50.
Since CMED rallied 5 weeks ago, the stock has not had a correction or re-test of the recent 10-month lows. The reversal week last week was an indication the stock does not want to go higher at this time and therefore a correction as well as a base building support period is likely. This is not a stock that has been reacting to the indexes and therefore its own chart outlook needs to be used. Nonetheless, if the indexes are under pressure it seems likely that CMED will use that as a reason to go down as well.
Sales of CMED between 45.45 and 45.92 and placing a stop loss at 46.40 and having an objective of 34.50 will offer a 10-1 risk/reward ratio. Even if a drop only to the psychological support level at 40.00 is seen, the risk/reward ratio would still be at least 5-1.
My rating on the trade is a 7 (on a scale of 1-10 with the strongest probability rating being 10).
PFE (Friday closing price 17.75)
PFE is a company that has been on a very evident downtrend since 1999 from a high of 50.03 down to last week's low of 17.12. Over the past year or two PFE has been hit with negative news regarding many of the pharmaceutical products they produce. Nonetheless, it is a well-established company that still carries quite a bit of weight in that industry.
With last week's low of 17.12 the stock has reached a level of support where a rally can be expected. In addition, in looking at many other pharmaceutical companies this weekend, I came to realize that that industry seems to have been outperforming the indexes in general. Now that the indexes may be reaching levels of support where a rally could occur, the pharmaceutical companies could be one of the first industries to generate a rally.
Support, on an intra-day basis, is decent at 17.03 (17.62 on a weekly closing basis). That was the low seen off of a correction back in 1997 from 21.59 when the stock was starting to make its long-term up-trend to the $50 level. In addition, the low of 17.12 seen last Monday held up well the entire week as 3 of the last 4 days generated a green close. Resistance is minor at 18.15 and 18.54 as those two prices have been recent high points of this recent downtrend. Stronger resistance will be found at 20.20, both from a psychological basis as well as from the 100-day MA. Major resistance will be up at 21.60 from the high made back in 1997 as well as from the 200-day MA.
It is evident that this stock has fundamental problems that will prevent the company from staging any kind of major rally at this time. Nonetheless, the company is very oversold, at a clearly defined support level, and in an industry that has been holding up during the recent downtrend in the indexes. The purchase of PFE offers a good risk/reward ratio with a high probability rating.
Purchases of PFE between 17.30 and 17.40 and placing a stop loss at 16.92 and having an objective of 21.60 will offer a risk/reward ratio of almost 10-1.
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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| Monthly & Yearly Portfolio Results
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Open Positions and stop loss changes
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| Status of account for 2007: Profit of $9758 per 100 shares after losses and commissions were substacted.
Status of account for 2008, as of 5/31 Profit of $4184 using 100 shares per mention (after commissions) Closed out profitable trades for June per 100 shares per mention (after commission)
JNPR (short) $432 EBAY(long) $36 RHT (short) 215 AA (short) $237 Total Profit for June, per 100 shares and after commissions $920 Closed out losing trades for June per 100 shares of each mention (including commission)
ORB (long) $191
HAL (short) $449 FTEK (long) $1315 RIO (long) $67 SNDA (long) $198 VLO (long) $186 CAT (short) $41 ITG (long) $237 STP (long) $209 Total Loss for June, per 100 shares, including commissions $2893 Open positions in profit per 100 shares per mention as of 6/30
INTC (short) $116
Open position in loss per 100 shares per mention as of 6/30ANGO (short) $556 BA (short) $1078 Total $1710
STP (long) $1238
Status of trades for month of May per 100 shares on each mention after losses and commission subtractions. YGE (long) $1054 ELON (long) $302 NTES (short) $25 JNPR (long) $310 RIO (long) $21 Total $2950
Loss of $3213
*Note: Losses this month were exacerbated with long-term fundamentals positions in ELON, YGE, and STP (not trading positions) where no stop loss was used. If the original stop loss placements had been used. the loss for the month would be over $1500 less. Status of account/portfolio for 2008, as of 6/30 Profit of $971 using 100 shares traded per mention.
NUAN got down to 14.26 this past week and close to the 14.14 objective I mentioned last week. The weekly closing support at $15 held up when the stock closed on Friday at 15.02. In addition, with the green close on Friday, the daily closing support at 14.76 was confirmed and a double bottom at that price now exists. The stock did leave a gap open on the way down between 15.50-15.58, which will work like a magnet. The 16.00-16.35 level is now strong resistance and at this time, do not see the stock being able to get much above that. Drops down to 14.14-13.96 are still possible, if the indexes keep on falling (likely). At this time, though, any daily close below 14.76 would be short-term negative.
ELON broke and closed below the 200-week MA and is now in danger of further drops down to the next major support level at $7. The $10 level is a strong psychological support level but with the intra-day drop below $10 this week, some of that strength has begun to vanish. Another close next Friday below 11.10 will confirm the break of the 200-week MA and weaken the chart. 12 out of the last 13 trading days have been in the red and therefore the stock is way oversold and ready for some upside. Nonetheless, while the indexes stay under pressure it is not likely that the stock will generate much of a rally. Any daily close below 9.70 will be considered quite negative. STP closed in the green on Friday and confirmed that the daily closing support down between 33.19-33.35 is decent. Nonetheless, the resistance on a daily closing basis is now strong at 36.35-36.38. Closes above or below these two levels will likely generate further movement in that direction. On an intra-day basis, there is strong support at 31.76 and Friday's low was 32.02. At 31.76 is where the bottom of the gap that was left on the way up is found. It is also a major low that was made back in August 2007, from which the stock began its rally up to the $90 level. Having closed on Friday near the highs, it is likely that some upside follow-through will be seen. Keep the 36.50 level in mind as that is going to be the resistance to watch at this time. If the stock is unable to break above that level, drops down to the 31.76 will be likely. YGE was successful in closing a gap between 14.75-14.82 that had been left open back in March. In addition, the stock was able to stay above the previous 13.99 support level, on a daily closing basis, seen back in March. The area between 13.19 and 13.99, on a daily closing basis, needs to be considered not only major support but also critical, when considering the long-term prospects for the company. A close in the green on Monday is needed to confirm a successful re-test of that support. On a weekly closing basis, the stock did close below the 14.73 support that was of consequence. Another close next Friday below 14.73 would confirm the break and give the stock further negatives. Resistance on a weekly closing basis is now decent at 15.00 and strong at 16.52. ANGO continued to trade in a sideways fashion this week and did not give any indications of direction. With the stock under pressure, though, the most probable direction is down. Strong resistance is seen at 13.99 and decent support at 13.33 and then again at 13.05-13.09. A break out from either of these two levels will likely generate follow through. INTC gapped down on Friday between 20.87 to 20.80 but managed to close near the highs of the day thus likely generate closure of the gap on Monday. Resistance is decent between 20.89 and 20.99 and if that resistance holds up, drops down to 19.62-20.00 are likely. Resistance is now also strong at 21.28 and that level should not be broken at this time. HON has a bearish looking inverted flag formation with the flagpole being the drop from 54.51 to 48.53 and the flag the area between 51.37 and 48.53. A break below 48.53 will give an objective of 45.39. A break above 51.37 could generate further upside. This is a stock to add shorts to on rallies near 51.00, using a stop loss at 51.57. NTES closed on Friday at a decent weekly resistance level between 21.26-21.45. After having tested the 22.08-22.18 level of resistance several times during the week, the stock failed to break above that level and gave it up on Friday. With the daily close on Friday at 21.27, the 21.45-21.55 level, on a daily closing basis, now becomes a decent resistance. A close below 20.69 will generate drops down to at least 20.00. A close next Friday below 20.69 will give an objective of a drop down to the 19.02, on a weekly closing basis. If the stock opens lower on Monday and is able to stay below 21.23, a drop down to 20.09 is probable.
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1) INTC - Averaged short at 22.215. Stop loss lowered to 22.00. Stock closed Friday at 20.66.
2) ANGO - Shorted at 15.90. Stop Loss lowered to 14.10. Stock closed on Friday at 13.70.
3) JNPR - Liquidated at 22.82. Averaged long at 23.735. Loss on the trade of $310 per 100 shares (2 mentions) plus commissions.
4) ELON - Averaged long at 12.41. No stop loss at present. Stock closed on Friday at 10.20.
5) ORB - Liquidated at 23.52. Purchased at 25.39. Loss on the trade of $177 per 100 shares plus commissions.
6) STP - Averaged long at 43.65 (2 mentions). No stop loss at present. Stock closed on Friday at 34.51.
7) NTES - Shorted at 21.54. Stop loss now at 22.38. Stock closed on Friday at 21.27.
8) RIO - Liquidated at 34.50. Purchased at 36.03. Loss on the trade of $153 per 100 shares plus commissions.
9) YGE - Averaged long at 21.90 (2 mentions). No stop loss at present. Stock closed on Friday at 14.10.
10) BA - Covered short at 64.22. Profit on the trade of $1390 per 100 shares (2 mentions) minus commissions.
11) HON - Shorted at 50.53. Stop loss now at 51.47. Stock closed on Friday at 50.31.
12) NUAN - Purchased at 14.30. No stop loss at present. Stock closed on Friday at 15.02.
Previous Newsletters
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Encyclopedia of Chart Patterns. A must have for chart aficionados! |
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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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