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Issue #71 
May 11, 2008 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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| DOW Fails To Advance On Last Week's Positive Close!
DOW Friday close at 12745
The DOW was unable to follow through on last week's rally and fell back to the major pivot point and support level, on a weekly closing basis, at 12743.
With continuing negative earnings reports being seen this past week plus the price of oil making new all-time highs 4 days in a row, the DOW succumbed under the selling pressure and was all out trying to maintain itself above that important support level.
The DOW closed near the day's and week's low and left the door open for further weakness this coming week if no supportive news comes out over the weekend.
Support is very strong at 12743 on a daily and weekly closing basis but if broken the next level of support, on an intra-day basis, is 12500-12518. There is very minor support at 12720, on a daily closing basis, but if broken, it will likely head down to 12589-12606. Resistance will now be very strong up at 13021 and again at 13058. Not only do you have previous closes at that price but also the 200-day MA.
The 20-day MA is currently at 12768 and if the DOW closes below that level on Monday, It is likely to be heading lower during the first few days of the week.
It seems evident that further upside, above what was seen last week, will be difficult to accomplish without strong fundamental news. Since most of the important earnings reports are now out and the Fed is likely heading into a 2-3 months hibernation period, it does not seem plausible to think that fundamental help will be seen any time soon. It is therefore probable that the recent 4-week up-trend is at an end.
On the other side of the coin, unless more negative news is seen this coming week (negative earnings reports, oil prices continuing to spiral upward, etc.), it is also likely that rallies back up to test the 13000 level will be seen. Changing of a trend, even a short-term trend, is usually a 1-3 week event and likely will have some backing and filling as well as a minimum of one re-test of the high.
Based on last week's range of 340 points and on the likelihood the buyers still have some residual strength, the possible trading range for the week could be 12657 to 12987.
NASDAQ Friday Close at 2445
The NASDAQ suffered a setback this past week when several negative reports, such as the failure of MST and YHOO to agree to a buy-out deal, were announced. Nonetheless, it does seem that as the week progressed, the index did not come under the same kind of pressure that the other two indexes came under and barely closed in the red on Friday.
It is important to note that the NASDAQ was only down 6 points from last week's close and when compared to the DOW, it can be said that the index showed strength, rather than weakness, in front of the onslaught of negative news.
The NASDAQ shows support, on a daily closing basis, at 2438-2441 and then much stronger down at 2413-2419. The 20-day MA is currently located at 2407 as well as several important daily low closes from 2 years ago. Below that level the 100-day MA is currently located down at 2387 and that would be an objective, on a daily closing basis, should the index close below 2413. Resistance has now become decent at 2483-2489. Strong resistance continues to be seen up at 2505-2515.
The failure of the NASDAQ to fulfill the chart, after its breakaway and runaway gaps down at 2291-2313 and 2348-2362 gave the index a strong push upward, is making the index look very vulnerable. It is probable the buyers will attempt to rally the index back up toward the 2500 level one more time, but if they fail to close above the recent high at 2483 the sellers will gain control and closure of those two above mentioned gaps will likely happen.
Probable range for the NASDAQ this coming week is 2407-2481.
S&Poors 500 Friday close at 1388
After having been successful last week in closing above the 1400 level the SPX failed to confirm the breakout and gave back all of the last 3 week's gain in just one week. In addition, the biggest disappointment was in failing to reach the daily close resistance levels up at 1433 and 1441 thus giving the bulls reason to doubt the validity of the recent rally and breakout.
The SPX did get up to the 100-week MA with last week's close and by closing lower this week, successfully confirmed the test of the line. Such a re-test could prove to be very indicative of a negative future outlook. In addition, the index has built a double top, on an intra-day basis, at 1423 that now looms imposing.
Resistance, on a daily closing basis, will now again be strong at 1400 and at 1409 and major up at 1420. Support is found at 1384 from the 20-day MA and at 1388 on a daily closing basis. Below that at 1371 from the 100-day MA as well as from a previous low.
The chart seems to be calling for a drop down to the 1371 level and then a rally back up to the 1400-1403 area. Based on the failure-to-follow-through action this past week, it seems quite unlikely the index will be able to re-establish itself above 1400. Like with the other indexes, weakness will likely be seen the first part of the week and some strength toward the latter part of the week. Nonetheless, unless there is some fundamental piece of news that gives the bulls ammunition, it is likely the SPX will be heading lower for the next few weeks.
The toughest time to trade any market is when the trend is changing. The indexes have been in a short-term up-trend for the past 4-6 weeks but now that all the earnings reports are out and the Fed has lowered the discount rate about as much as they can, the market has lost most of its upward momentum and seems to be tired. The change from a short-term up-trend back into a short-term downtrend is a period of flux where both the buyers and the sellers are trying to establish control but do not yet have the strength necessary to accomplish breaking of support or resistance levels.
This past week it became evident that the buyers have lost their edge and that a round of profit taking occurred. Weekly closes are always important and this past week all indexes were able to close at levels that are not indicative of anything other than a successfully defensive mode. This coming week it is likely the indexes will continue to trade in a defensive mode waiting for some positive news of consequence to appear. At some point in time, when the buyers feel the profit taking is over, they are likely to attempt to re-establish the up-trend and a rally up to the resistance levels will occur. It is my belief that the attempt to re-establish control will fail and in so doing, the sellers will once again gain control over the marketplace.
One additional factor to consider this week will be options expirations. If for no other reason, that fact alone could make this a difficult week to trade.
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Stock Analysis/Evaluation
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CHART Outlooks
Based on the assumption that the indexes have reached the top of a sideways channel, mentions this week will be all be sales. In most cases, though, a rally during the week will be needed in order for the stocks to reach the desired entry points.
HON (Friday Close at 60.63)
HON is a stock that fits the sideways trend mold perfectly as the stock has been in a very well-defined trading range between $52 and $62 since July of last year. AT this time, there doesn't seem to be any reason to believe the sideways trend the stock has been in for over 10 months will change.
Since July HON has traded up to the $62 on 4 different occasions (61.90, 62.26, 62.00 and Friday's 61.95) and on the 3 prior occasions before now, the stock dropped back down at least $9 (52.88, 53.05 and 52.05) within 2-3 weeks. Such consistent action makes this trade very attractive.
In addition, over a period of two weeks, HON had built a flag formation to the upside that loomed imposing but on the breakout, the stock failed-to-follow-through and negated the flag. The subsequent drop down to 58.37 was exactly down to a previous low at 58.41. The stock held that low and on Friday had a reversal day with higher highs, lower lows, and a close above the previous day's high that should re-stimulate the stock to break above $60 this coming week.
Resistance is major between 61.90 and 62.26 (61.77 on a daily closing basis). Support will be found at 59.23 (minor), at 58.41 (decent), at 56.00 (minor), at 55.00 (minor) and then down at 53.00-53.50 (major).
HON, on the most recent rally, left a gap open between 57.98 and 58.33. The gap will become a magnet as soon as the sellers are able to determine the buyers are unable to break above the resistance level at $62. Closing of the gap area will also bring additional selling as it will also mean a break of the daily MA's as they are "all" currently found between 57.80 and 58.80. Breaking of the MA's will likely project the stock down to the $53 level, as all supports below the MA's are minor in nature until that level is reached.
Sales of HON between 60.93 and 61.33 and using a stop loss at 62.40 and an objective of 53.00 will offer a risk/reward ratio of 6-1. Minimum objective would be a drop down to the $55 level and that would still offer a 4-1 risk.reward ratio.
My rating on the trade is a 7.5 (on a scale of 1-10 with the strongest probability rating being 10).
DIOD (Friday close at 27.51)
DIOD has been on a strong 18% rally since the last earnings report, 4 weeks ago, came out bullish. The stock has rallied from a low of 23.07 up to last Thursday's high at 28.18. The stock, though, reached the 200-day MA this past week and has been flirting with the line for last couple of days. In addition, the stock has reached a previous level of resistance of some consequence up at $28.
DIOD is a stock that has shown itself to be strongly related to moves in the DOW. Over the past 9 months the stock's highs and lows have been directly related to that of the index and with both the stock and the index having reached resistance levels of consequence, it seems likely that DIOD will respond alike.
Resistance in DIOD on a weekly closing basis, has been shown to be very strong at 27.61-28.01 and on an intra-day basis at 28.48. Since March 2006, the stock has shown 5 weekly closes between 27.61 and 28.04, with 4 of those closes being weekly highs (resistance) and one of the closes being a weekly low (support). Should this resistance level break for whatever reason, there is one additional strong intra-day resistance at 29.23. On a weekly closing basis support is decent down at 24,36-24.50 and major down at $22-$23. On a daily closing basis there is decent support at 26.31 and then nothing until 24.59.
It seems likely that rallies above the $28 will be met with strong selling and though a rally as high as 29.39 could occur, it is also likely the high of this move will be somewhere between 28.00 and 28.50. With the stock seemingly directly related to moves in the DOW it seems like a good stock to short. In addition, the stock has been having problems keeping itself above the 200-day MA currently located at 27.60 and daily closes below that level this coming week will weaken the chart.
Sales of DIOD above 28.00 and placing a stop loss at 28.60 and having an objective of 24.60 will offer a 5-1 risk/reward ratio.
My rating on the trade is a 7 (on a scale of 1-10 with the strongest probability rating being 10).
PDCO (Friday closing price 35.79)
PDCO is yet another stock that seems to be in a very well defined sideways trend and a great candidate for a short position as it is nearing the probable top of the range. Since November 2005 PDCO has traded between $30 and $40 but in November of last year the stock fell down to the $28 level and it is likely the trading range may have changed to $28-$37.
In April PDCO, when the stock was trading near the $38 level, it evidently received some bad news and fell all the way down to a support level at 32.50. With the recent strength in the indexes the stock has been able to recover from that drop and on Thursday the runaway gap was filled. It is now likely the breakaway gap up at 36.92 will also be filled and a re-test of the previous high at 37.70 high will be seen.
Resistance is very strong, on an intra-day basis, at 37.09 and then again at 37.45 and 37.79. On a weekly closing basis, resistance is major between 37.18 and 37.61. Support is far away as other than the 100-day MA at 35.15 there is no support of consequence until the $34 is seen. Strong support, on a weekly closing basis will be found between $33 and $33.50.
It seems evident that if the DOW rallies back up to the 13000 level that PDCO will be trying to close the gap up at 36.92. Nonetheless, the resistance above the $37 dollar is of such strength that without strong fundamental assistance, it will not likely break. With a clearly defined sideways trend for the last 30 months, it seems likely the trend will continue but with the drop down to 28.32 back in November the $30-40 range is now likely to be $37-28.
Sales of PDCO above 37.00 and using a stop loss at 37.90 and an objective of at least 32.50 (recent low) will offer at least a 5-1 risk/reward ratio. Should the support at 32.50 break (quite possible) the stock will likely get below the $30 and risk/reward ratio could go as high as 8-1.
My rating on the trade is a 7.5 (on a scale of 1-10 with the strongest probability rating being 10).
AA (Friday closing price 39.04)
AA is a stock that over the past 10 years has traded in a very well-defined trading range between $30 and $40 for 80% of the time. During this time there have only been only 3 occasions when the stock traded substantially above the $40 level (43,61, 45.61, and 48.77) and on each of those occasions it was at the same time that the DOW was making a "peak" high. In addition, during the same 10 years, the stock has been above the 39.00 level on 14 other occasions and only on 3 of those occasions was it able to get above $40 with highs of 40.04, 40.50 and 40.70.
AA staged a strong rally over the past 7 trading days from a low of 33.60 to Thursday's high of 39.67. Since February of this year, AA has had trouble getting above the 39.65 level with 3 attempts, all of which were followed by drops of $4, $6, and $6.
Resistance is very strong at 39.67 and then again between 40.04 and 40.70. Support is minor at 36.94 and then decent at 35.56. Strong support is found down at 33.60-33.80.
It seems evident that the over the last 10 years AA has moved in some kind of unison with the DOW. With the indexes seemingly in a topping out formation as well as the stock reaching an area of major resistance, AA presents a shorting opportunity with an excellent risk/reward ratio as well as high probabilities of success.
Sales of AA at 39.63 and using a stop loss at 40.80 and an objective of 33.80 will offer a 4-1 risk reward ratio.
I am using 39.63 as an entry point but if the DOW does generate a rally back up to the 13000 level it is possible that AA will get above $40. My strategy will be to short the stock at 39.63 but add more short positions on any rally above the $40 level.
My rating on the trade is an 8 (on a scale of 1-10 with the strongest probability rating being 10).
I would also like to mention that sales of XOM above 93.00 and NYX above 74.00 should be considered. If interested, please ask me for details.
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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 has now given a successful re-test-of-the-highs signal with a close below last week's close. The stock now has a double top on the weekly charts at 21.50 and another double top at 21.00. From a purely chart view, such a double-double top must be considered impressive and without fundamentals news of consequence such a formation is unlikely to be broken. The stock successfully tested the 20-day MA at 20.17 when it closed higher on Thursday and Friday. Nonetheless, that means that a close below Wednesday's close at 20.17 will generate a round of profit taking and selling. There is no support of consequence until the 18.50-18.60 level is seen. On a weekly closing basis (next Friday) strong support will be found at 19.15. It is evident that NUAN will be trading off of the indexes and therefore they bear watching when making a decision. An intra-day break below 19.96 will likely generate a drop down to 18.65 where the 50 and 100 day MA are currently located. Resistance will now be strong at 20.85 on a daily closing basis and at 21.14 on an intra-day basis. ELON closed on Friday at exactly the 200-day MA at 10.77 and a close above that level next Friday would be a buy signal of some consequence. Nonetheless, on the daily chart, the stock did successfully re-test the breakdown level at 11.23 with a close on Wednesday at that price, and lower closes on both Thursday and Friday. Such a successful re-test continues to favor the sellers and a daily close any day this week below 10.64 would likely thrust the stock into new 52-week lows below the recent low of 10.36. It seems evident that ELON will make a defining decision on its future this next week as a lower weekly close next Friday would be quite bearish whereas a higher weekly close would be bullish. Nonetheless, in the meantime and during the intra-week trading, it is possible the stock will head down to the $10 level if the indexes show weakness during the week. RIO continues to look very bullish on both the daily and weekly chart but did sustain a bit of short-term profit taking when the indexes showed weakness. It seems likely that RIO will be heading down to the 38.50 level sometime this week as a small correction down to the 20-day MA as well as a re-test of the previous intra-day highs prior to the breakout is needed. A daily close below 38.27 would be a small signal that perhaps further downside will be seen but unless that happens, the chart continues to look very bullish. If the stock does have its weekly correction with a lower low than last week's low at 38.92 it will also be unlikely the stock will go above last week's high of 41.05. Nonetheless, a range between 38.27 and 40.40 or 38.50 and 40.67 is the most probable scenario. At this time no signal has been given to liquidate the position. A daily close below 38.27, though, would be worrisome and would generate a liquidate-longs signal. VLO has broken all supports and shows no support of consequence underneath. There is minor support at 43.95 and even more minor support down at 41.05. Psychological support must be expected as well down at the $40 level. From a purely chart basis, this stock should have been liquidated when it closed below 47.33 on Friday. It is likely that at some point this week or next, the breakdown level at 47.70 will be tested. Such a re-test should be used to liquidate the position, unless the stock is able to go substantially higher intra-day. Expect further weakness on Monday unless oil prices start to retreat. FTEK broke down below previous support levels this past week due to a negative earnings report, nonetheless the stock showed a bit of strength during the week by reversing the breakdown and closing on the 100-week MA on Friday. Such action gives the bulls some reason for optimism. In looking at the weekly chart, it was evident that a correction to the recent and straight up move from 16.57 to 24.51, on a weekly closing basis, was needed. Now that the negative news is out and the stock has held its chart points, it is possible to believe the stock may be heading higher after all. I did expect the FTEK to close down around 21.96-22.00 on Friday as that is where the strong support is at, but closing in the green and at the 100-week MA was a strong positive. On a daily closing basis the 21.96 level will continue to be strong support and the 23.71 level resistance. A close above 24.00 would be reason to believe the stock will be heading back up to the 27.15 intra-day high seen two weeks ago. Trading range for the week is likely to be 22.00-24.00. STP had a disappointing close on Friday when it closed below the 43.16 level which has been an important pivot point on the weekly chart. Nonetheless it cannot be said the stock broke below that level as the close was only 19 points lower and this is a volatile stock. Such a close does not confirm or even signify a break. Nonetheless, the disappointment was evident when the #1 company in the solar industry, FSLR, was up substantially all day and STP barely closed in the green. On the weekly charts (Friday's) it is important that STP close next Friday higher than this week as a lower close would confirm a break and turn the chart negative. On the positive side, the daily close at 41.70 seen on Monday held up all week and the previous daily low close at 42.74 held up as well. In looking at the daily chart, it can be said that Friday's drop down to 41.91 was a re-test of the previous low at 41.10. With the close near the highs of the day on Friday, a rally of only 30 points on Monday (above 43.25) would be a mini buy signal that would likely generate a rally up to the 44.60 level. A close above the 20-day MA at 44.85 would re-stimulate the stock to the upside and give a $49 objective. Overall, both the daily and weekly charts look quite positive, even bullish. RMBS continues to look bullish with the flag formation still in place. The stock has been able to maintain itself above the recent low daily closes at 22.28 and as long as that continues, the chart will look good. It is possible that if the indexes are weak this coming week that a drop down to the 21.41-21.53 level is seen. Nonetheless, such a drop should be used to purchase more stock as that is the level from which the breakout occurred as well as where the 50-day MA is currently located. It seems unlikely that the stock will break that level unless bearish news comes out. Chart continues to look bullish but a close below 22.28 will weaken the short-term chart and likely add 1-2 weeks to the time frame for the stock moving up. A close above 23.50 should stimulate an immediate move up.
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2) VLO - Purchased at 50.61. No stop loss at present. Stock closed on Friday at 44.56.
3) FTEK - Purchased at 23.83. Averaged in at 23.955. Stop loss at 21.86 . Stock closed on Friday at 22.76.
4) OVTI - Liquidated at 14.90. Averaged long at 15.85 (2 mentions). Loss on the trade of $190 per 100 shares plus commissions.
5) RIO - Purchased at 39.82. Averaged long 38.345. Stop loss at 36.53. Stock closed on Friday at 39.58.
8) STP - Purchased at 44.90. No stop loss at present. Stock closed on Friday at 42.97.
9) ELON - Purchased at 11.70. Averaged in 13.216 (3 mentions). No stop loss at present. Stock closed on Friday at 10.77.
10) RMBS - Purchased at 22.23. Stop loss lowered to 21.31. Stock closed on Friday at 23.59.
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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