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Issue #80 
July 13, 2008 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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| DOW Drops Into Outer Fringes of Important Support!
DOW Friday close at 11101
The DOW continued its downtrend this week with yet another lower weekly close. Nonetheless, on Friday the index reached an important psychological level of support at 11000 and the kind of volatility seen upon reaching that level, likely means that strong buying or short-covering interest exists there.
The DOW is in a bear market scenario but in very oversold condition and in dire need of a corrective phase. The sellers are probably looking to take some profits at this price and re-sell at a higher level where they can control their risk more efficiently. With all the bad news hitting the market in the last two weeks there doesn't seem to be much more news that could affect the market negatively, other than perhaps surprisingly bearish earnings reports.
Even though the DOW has been oversold recently, during this past week the sellers continued to push downward as there was no positive news or previous strong support levels to offset the negatives. Until such a time the index is able to confirm support or receives positive news all rallies will be sold.
It is important to note, though, that the DOW has now gotten to the top tier of a previously strong support level between 10700 and 11000. This support level was in place for 10 months between Nov05 and Sep06 and not likely to get broken easily.
On a daily closing basis, support is decent between 11074-11109, decent again at 10956-10974, and then very strong at 10706-10739. On a weekly closing basis (Friday's), support is decent between 11088-11109, minor at 11022, strong at 10739, and strong again at 10669. On a weekly closing basis, resistance is decent at 11240-11280 and very strong at 11578. On a daily closing basis, resistance is also strong between 11240 and 11280 and major at 11643.
It is evident that the DOW has now begun to reach levels of support from which a short-covering rally will likely occur. Nonetheless, it is still not known which of the support levels mentioned above will be the one from which the rally will begin. On Friday the DOW closed at 11101 and that was right at the first support level on the weekly closing chart. Whether the index heads down to the next level of support or not, is not something I can tell right now. Certainly a trading range for the next few months between 10700 and 11640 is likely but on a short-term basis nothing has yet been defined.
It is likely that the volatility will continue this coming week but that the trading range will shrink. On an intra-week basis, I can see a trading range this coming week between 10902 and 11335. In looking at the weekly chart I would expect the index to be under pressure at the beginning of the week and go below this week's low at 10978 down to perhaps 10902. I would then expect the index to show some strength toward the latter part of the week with a rally up to 11335 and close out the week between 11240-11280.
Keep in mind that this is still a bear market and rallies will be met with strong selling. In order to generate a "consistent" short-covering rally up to the 11600 area, it is likely the DOW will have to go through a base building process first. At this moment, there is still a higher probability of a drop down to 10700 first than a rally up to 11600.
NASDAQ Friday Close at 2239
Once again, the NASDAQ is likely to be the chart to follow this coming week as it is the only one of the indexes where the March lows have not yet been broken. It is evident that this most recent fall in the indexes has been caused by higher oil prices, crumbling financial institutions, and inflationary increases in commodity prices. Nonetheless, with the NASDAQ not representing the stocks most at risk in this scenario, the index has continued to outperform the other indexes by staying above its March lows. It is the only index where supports can be relied upon to give a true picture of how these factors are truly impacting the market.
It is evident that if the NASDAQ breaks down and makes new lows that whatever confidence is left among traders, regarding the possibility of a bottom being in the process of being made, will suffer a strong setback. As such, the NASDAQ must be the index to monitor if you are a bull.
On a daily closing basis, support is major between 2169 and 2177 and decent at 2205. On a weekly closing basis, support is major between 2205 and 2212. On a daily closing basis, resistance is decent at 2264-2268, stronger at 2293, and major up at 2354-2371. On a weekly closing basis there is decent resistance at 2300 where the 200-week MA is currently located and major resistance up at 2343. On an intra-day basis, there is an important support at 2203 that was tested on Friday and from which the index generated a strong bounce.
The NASDAQ did get down to 2203 on Friday but a gap between 2201 and 2203 was left unclosed. It is likely that gap will continue to act as a magnet and that it will be closed at some point this week. Intra-day drops down to the 2187-2190 level would then likely happen.
Based on the daily closing chart, it seems probable that the index will be generating a daily close around 2205-2212 at some point this week. It is therefore likely that in the early part of the week some follow through weakness, from last week's drop, will be seen. By the same token, it also seems probable that if the indexes are reaching at least a temporary bottom, that next Friday the NASDAQ will close higher than this week and give, on the weekly chart, a successful re-test-of-the-lows signal.
Possible range for the week could be 2187 to 2283 with a close next Friday above 2239.
S&Poors 500 Friday close at 1239
The SPX did manage to close on Friday above an important weekly close support at 1236, thus opening up the possibility that if the index closes higher next week that it will be seen as a successful re-test of that support level. This is a level that if it would have broken on Friday would have likely opened the door to another strong drop in price this coming week. By closing above the 1236 level it likely means the stock is near a short-term bottom from which a rally could occur.
In looking at the chart for the past few years, the SPX does have a history of trading between 1219 and 1298 with short breaks up to 1327 and down to 1168 being seen as well. From Oct05 to Sep06 the index traded between 1168 and 1327 but 70% of that period of time the index traded between 1219 and 1298. It is likely that the same trading range will be seen this time.
On a weekly closing basis, support is strong at 1236 (1219 intra-week), stronger at 1168-1187, and major at 1143. On a daily closing basis, strong support is found at 1236 and then again at 1224. Below that, though, there is some minor support at 1205 and then nothing until the 1168 level is reached. Resistance on the weekly chart is strong at 1288/1289 and major at 1326. Some minor resistance is also found at 1270.
The SPX might give a clue on Monday as to whether the indexes will go below this past week's lows or not. The charts on the other two indexes do show the probability is high of lower lows being seen this coming week. Nonetheless, the SPX charts shows that if it opens up on Monday at or above 1247 and does not sell off from there, that the rest of the week will be higher.
By the same token if that does not happen, it is important to note that the 1219 level intra-day is important support and if the indexes want to stage a late week rally, that level needs to hold.
Probable range for the week in the SPX is 1219-1270.
It is rare for any stock or index to turn around on a dime without fundamental news. The process of finding a temporary bottom and then staging a short-covering rally normally takes about 1-3 weeks. This is still a strong downtrend and in a bear market and therefore rallies will continue to be sold aggressively until such a time the bulls have shown some ability to be able to stop further drops.
It is likely this coming week will be a transition week where new lows of this move will be made. Nonetheless, it is also likely that the support levels found here will hold up for a few weeks at least and that a short-covering rally will be seen within the next couple of weeks. I see the indexes still being under pressure on Monday and maybe on Tuesday, but by Wednesday rallies should begin to occur.
Expect volatility as the earnings report quarter has begun and each day there will likely be good news as well as bad news. Nonetheless, with the oversold condition of the markets and having reached strong levels of support, there should be enough buying coming in this week to prevent a further strong move downward at this time.
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Stock Analysis/Evaluation
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CHART Outlooks
With the indexes having reached the outer fringes of a strong support base, it is likely that some oversold stocks may enjoy a short-covering rally. Mentions this week will be mainly purchases but keep in mind that this is a bear market and taking on long positions will be like threading a needle. In addition, long positions need to be on a short-leash and rapidly liquidated should they break their supports or reach their upside objectives.
VLO (Friday Close at 32.63)
VLO is a stock that has plummeted over the past 6 weeks from a high of 50.92 to Friday's low of 31.28. Most of the reason for this drop is high oil prices and reduced refinery margins that have brought the entire industry to a standstill. Nonetheless, another reason for the major drop is that once the stock started trading below $46 there was no previous support levels of consequence at which buyers could venture to buy while controling their risk. Such a scenario caused the sellers to gorge on the stock without much fear of retribution.
VLO is now reaching levels where there is previous support of consequence and with the oversold condition of the stock as well as the indexes nearing the same kind of scenario of support, it is likely the stock will attempt a short-covering rally soon.
Intra-week support is major down at 28.90 but on a daily closing basis that same support level is seen at 30.33. No other support is found at this time. On a daily closing basis, resistance is minor at 33.95 (34.95 intra-day), at 36.70 (37.03 intra-day), a bit stronger at 37.94 (38.20 intra-day), and major up at 39.27 (40.98 intra-day).
It is likely that at some point this coming week the stock will go below this past week's low at 31.28. Nonetheless, with that low seen last week, it is also possible the stock may have seen its lows with the drop to 31.28 and simply open higher and go from there. The key I believe is 32.83. If the stock opens above 32.83 and does not go below that level intra-day, the probabilities of the rally beginning on Monday, with no further downside being seen, increase. If the stock opens unchanged to lower, then it is likely that the stock will get down into the 30's where a purchase would be attractive.
Purchases of VLO between 30.43 and 30.93 and using a stop loss at 28.70 and having an objective of 40.98 offers a 5-1 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).
FTEK (Friday close at 18.17)
FTEK is a company that produces optimizing combustion systems in utility, industrial, and municipal solid-waste applications. One of the main users of FTEK's systems to reduce pollution for coal-fired power plants is China and the coming Olympics could bring much more exposure to the world regarding this problem and the involvement the company in cleaning up the environment. Though not a sexy industry, reduction of pollution may be one of the biggest economic opportunities available in the next decade. It is important to note that in China (one of the main clients of FTEK) it is estimated that the country will be building the equivalent of one coal power plant per week for the next decade. Even though at this time at the current valuation levels the stock may still be fundamentally overvalued, FTEK is likely facing an enormous growth curve in the coming months.
Even though the stock has taken quite a tumble in the past few weeks, coming down from a high of 27.15 to a recent low at 16.67, the stock has been acting relatively strong during the last week in spite of the recent drop in the stock indexes. As such, it seems evident that FTEK is near levels where strong buying is likely to occur.
On a daily closing basis, support is quite strong at 17.02-17.25, again at 16.36, and major down at 15.77. On a weekly closing basis, support is very strong at 17.56 and major at 16.46-16.57 where a double bottom exists. In addition, there is a previous high close of consequence at 18.50, which is where the stock closed at this past Friday. On a weekly closing basis, resistance is decent at 20.07 and very strong at 22.74. Major resistance up at 23.50 (100-week MA) and at 24.40 (several previous weekly high closes of consequence). On a daily closing basis there is some minor resistance at 18.84 and then at 20.57. Strong resistance on the daily chart will be found at 22.40.
It is evident that this is a stock with great future potential but one that has been under strong pressure over the past few weeks. Due to the breakdown of supports and recent weakness, FTEK is not a stock that at this time should be chased or bought at an undefendable price. Nonetheless, the stock is near levels that are attractive and if the stock shows some weakness this coming week, should be bought. Keep in mind that there is an open gap in the chart between 16.34 and 16.51 that has not yet been filled. Based on the recent strength the probabilities of the stock getting down to that price have diminished. Nonetheless, they have not disappeared and must be part of any chart evaluation.
Purchases of FTEK between 16.67 and 17.10 and placing a stop loss at 15.66 and looking at a viable objective of 22.40 offers a risk/reward ratio between 3 and 5 to 1 (depending on the entry point).
My rating on the trade is a 7 (on a scale of 1-10 with the strongest probability rating being 10).
ITG (Friday close at 29.68)
Two weeks ago ITG broke below the 200-week MA at 36.70 as well as below a 2-year intra-week low at 35.36 and dropped precipitously 23% in price ($8) down to a low of 27.26. Nonetheless, during that drop the stock reached a previous level of intra-day support down in the mid to low $27's. The $27 level, back in 2001 and 2002, was one of great consequence. The stock now seems like a prime candidate for a strong and fast short covering rally.
The stock did reach that level this past week and was able to generate a $3 bounce off of the lows that signals that the traders are very aware of the strength of the support seen at that price. Nonetheless, the stock needs to do a bit of backing and filling as well as some form of a re-test of the lows before it is able to generate the expected short-covering rally.
On an intra-day basis, support is very strong down at 27.87 and again at 27.40. On a weekly closing basis, though, that same support is found at 28.95 and again at 27.55. Resistance, on a weekly closing basis, is non-existent until 33.46 to 33.76 (35.13 intra-week) is reached. Major resistance will now be found between 36.75 and 37.75 (from the 200-week MA as well as a major high weekly close back in 2001, respectively).
ITG is a volatile stock with wide ranges in trading as it was evident this past week with a $6 weekly trading range and two $3 daily trading ranges. As such this is a stock that requires fast action and decisive entry points in order to be able to control the risk/reward ratio of the trade. Nonetheless, since the stock already reached the prime entry point last week with the drop down to 27.27 it is not likely the opportunity to enter at that price will be seen again this week, and therefore a bit of risk will need to be taken.
Purchases of ITG between 28.65 and 28.85 and placing a stop loss at 27.07 and looking for a rally up to the 36.72 level will offer a risk/reward ratio of 5-1.
If the stock is trading below 28.65 you may want to wait for the 27.75-28.13 level to consider buying but lower than 27.75 you are not likely to see the stock at this time. In addition, keep in mind that the 36.72 level is a primary objective but very decent resistance will be found at $35. When doing your risk/reward ratio evaluation the lower level should be primarily used.
My rating on the trade is a 7.5 (on a scale of 1-10 with the strongest probability rating being 10).
PFE (Friday closing price 17.81)
PFE is a company that has been on a very evident downtrend since 1999 from a high of 50.03 down to the low made two weeks ago at 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 17.12 low the stock has reached a level of support where a good short-covering rally can be expected. In addition, in looking at many other pharmaceutical companies, I have come 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 help up the entire week and 3 of the last 4 days generated a green close. Resistance is now strong at 18.54, as that was this week's high. At that price, on the intra-day chart, a double top now exists. 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. In addition, the rally seen this past week has been a signal that the stock is likely to be forming a bottom from which to generate a decent short-covering rally.
In addition, the chart formation on the daily chart seems to have the look of an inverted head & shoulders with the left shoulder at 17.55, the head at 17.12 and two necklines at 18.54 and the right shoulder in the process of being built. Such a formation if broken (a break above 18.54) projects a short-term rally up to 19.96.
Purchases of PFE between 17.55 and 17.75 and placing a stop loss at 16.92 and having an objective of 21.60 will offer a risk/reward ratio of 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).
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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 not only closed this past week below a very important weekly close support at 15.02 but confirmed the break of the 100-week MA at 15.60 by closing below that level for a second time. Such a break will put the stock on the defensive and increase the probabilities of lower levels being seen. Using the weekly closing chart, there is a minor support level at 13.97. Using the intra-day chart there is also some decent support at 14.14. Nonetheless, if the 14.14 level breaks intra-day, there is no support intra-day or on the daily chart until the 13.39-13.46 level is reached. If the indexes reach their probable lows for the week and the stock has not broken below 14.14 then it is likely a purchase. If the 14.14 low is broken, it is highly likely that a drop down to 13.39 will occur. It would be a strong buying area for me. ELON had a very good week as it was able to survive the break of the 200-week MA, the break of the previous low daily close at 10.64 as well as a break of the previous low weekly close at 10.77 without going into the gutter. In addition, it also survived a break of the very important psychological support level at $10. On Friday the stock gave a strong buy signal by reversing last week's close below the 200-week MA as well as closing above the previous low weekly and daily closes and also closing above the week's rally high close at 10.82. All in all, it was a clear short-term buy signal for the stock. Nonetheless, with the break of the previous lows, it seems that the stock now finds itself in a wide downtrend channel with only an upside objective of reaching just above the $14 level. At this time, such a rally would be reason to liquidate the positions, at least for the short-term. Long term outlook will not be able to be determined until such a rally occurs and the stock returns to test these lower levels once again. STP was able to hold itself above the previous week's low at 32.02 with another drop down to that level this past week. Such a double bottom looks supportive on the daily chart but on the weekly chart the stock has not yet shown a known pattern that can be seen as short-term bullish. Nonetheless, each stock often has its own quirks and in the past STP has been able to generate a consistent rally with this same pattern. A rally above 36.00 this coming week is needed in order to visualize the rally continuing up to the major resistance up at the $40 level. Nonetheless, using regular chart patterns for other stocks, it seems that a break of the double bottom at 32.02 is likely and that a drop down to at least the mid 31's or even perhaps down to 30.80 to close an open gap at that price has a high probability. A break above 35.09 intra-day would allay that probability and a break above 36.00 would likely negate any possible drop to that level at this time. Tough call on this one this week. YGE seems to have reversed the break of the weekly support at 14.50 and again at 14.75 with a close this past Friday at 15.37. This past week the stock did get down to 13.26, which is considered a re-test of the 10-month low at 13.11-13.15. Such a re-test is now considered successful on the daily chart but not yet on the weekly chart. A rally next week above this week's high of 15.72 would make that re-test successful on the weekly chart. In addition, such a rally would make that level into a strong double bottom on the weekly chart as well. There is decent resistance intra-day on the daily chart at 17.15 (previous high of consequence and 20-day MA). Minor support now at 15.00 and much stronger at 13.75. INTC broke down this week and reached its primary downside objective with a drop down to 19.71. Nonetheless, on the weekly chart the stock failed to close higher than last week and still shows it to be in a downtrend. The rally on Friday up to 21.18 did not accomplish anything, as there is decent resistance up at 21.28. Drops down to 19.44-19.71 are still likely with an outside possibility of a drop down to 18.75. Intra-day volatility between the ranges mentioned above is likely as well. HON did not accomplish anything this past week on either the daily or weekly chart. The trend is still down and the probabilities of the stock seeing lower levels continues to be high. The inverted flag formation is still in place and a break below 48.43 will likely stimulate a drop down to the $45 level. Nonetheless, the stock seems to be stuck in a $2 daily closing range between 49.62 and 51.47. A close above or below those two levels will likely generate follow through. Short positions should be held unless the stock is able to generate rallies above $52, even if the stock indexes are able to generate a rally. NTES was able to hold itself above the major support level at $20 this week even though the chart continues to look like the probabilities are stronger for a breakdown than for a rally. With the close on Friday at 20.57 the previous daily and weekly closing support at 20.69 was broken but not by a sufficient amount as to make it a clear-cut break. Nonetheless, if there is another close next Friday lower than 20.57 then it is likely the stock will drop down to at least the $19 level. Stops should definitely be lowered to 21.87 but any move above 21.47 or even above 21.27 would likely be bullish. Keep an eye on 21.27 and on 20.17 as two levels that will likely generate further movement in that direction. BA got down to the next minor weekly support level at 63.20. Nonetheless, the stock was unable to show any reversal of trend as it closed below last week's close even though the stock rallied intra-week and received some positive fundamental news. The trend is still strongly down and the next support above minor consequence is down at 60.60. Major support continues to be 55.50. With the close on the lows of the week and below the previous daily and weekly low close, it seems highly likely the stock will continue its downtrend this week. As crazy as it might sound the chart shows the possibility of a drop down to the $58 level this week. Should the stock close above 63.90 on Monday the break on Friday could be negated. Stop loss should now be lowered to 67.33. JNPR broke below the previous low at 21.38 on Friday but then reversed itself to close right at the previous daily low close at 21.74 thus negating the break. The stock did have a reversal week with higher highs and lower lows than last week but was able to close above last week's low but not above last week's close. The stock does show some decent support from a major previous high daily close at 21.56 as well as an important daily low close at 21.31. It is because of these levels that I nibbled on the long side of this stock on Friday. The chart is not giving any buy signals yet so there is no strong reason to buy. Nonetheless, the stop loss at 21.13 makes the risk very small. Resistance is decent at 23.68-23.90 but if broken there is no resistance until the mid 25's. JNJ with the close in the red on Friday the stock did show that the previous day's close at 66.94 was not only a successful re-test of the previous high daily close at 66.96 but also opened up the possibility of it being a double top. The stock does have its earnings report on Tuesday and it is evident that the stock has set itself to go either way, in a strong manner, based on the results. Intra-day support for Monday is quite strong at 65.10 and equally strong resistance at 67.10. On a daily closing basis, the support is at 65.90 and the resistance up at 66.76. The direction of this stock will totally depend on the earnings report so there is nothing else to say.
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1) INTC - Liquidated half of the shorts averaged at 22.215 at 20.20. Profit on the trade of $201.50 per 100 shares minus commission.
2) ANGO - Liquidated shorts averaged at 15.90 at 13.99. Profit on the trade of $382 per 100 shares (2 mentions) minus commission.
3) JNPR - Purchased at 21.55. Stop loss at 21.13. Stock closed on Friday at 21.76.
4) ELON - Averaged long at 12.41. No stop loss at present. Stock closed on Friday at 11.12.
5) INTC - Short at an average price of 22.215. Stop loss lowered to 21.38. Stock closed on Friday at 20.64.
6) STP - Averaged long at 43.65 (2 mentions). No stop loss at present. Stock closed on Friday at 34.24.
7) NTES - Shorted at 21.54. Stop loss lowered to 21.89. Stock closed on Friday at 20.57.
8) AMZN - Shorted at 74.06. Liquidated at 72.66. Profit on the trade of $140 per 100 shares minus commissions.
9) YGE - Purchased at 13.69. Averaged long at 19.156 (3 mentions). No stop loss at present. Stock closed on Friday at 15.37.
10) BA - Shorted at 65.67. Stop loss now at 67.33. Stock closed on Friday at 63.28.
11) HON - Shorted at 50.53. Stop loss now at 51.79. Stock closed on Friday at 49.31.
12) NUAN - Liquidated long purchased at 14.30 at 15.07. Profit on the trade of $77 per 100 shares minus commissions.
13) AMZN - Shorted at 75.00, 73.95 and 71.70. Averaged short at 73.55. Liquidated at an average of 67.916. Profit on the trade of $1690.20 per 100 shares (3 mentions) minus commissions.
14) ABB - Shorted at 27.71. Covered short at 26.38. Profit on the trade of $138 per 100 shares minus commissions.
15) EBAY - Shorted at 29.10. Covered short at 27.64. Profit on the trade of $146 per 100 shares minus commissions.
16) CMED - Shorted at 45.21. Stop loss lowered to 45.37. Stock closed on Friday at 43.18.
17) EBAY - Shorted at 27.96. Covered short at 28.10. Loss on the trade of $14 per 100 shares plus commission.
18) JNJ - Shorted at 65.70.Stop loss now at 67.30. Stock closed on Friday at 66.26.
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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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