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Issue #187 
August 08, 2010 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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| Indexes Able to Dismiss Negative News. Further Upside Likely.
DOW Friday closing price - 10653
The DOW had a erratic week in which both the bulls and the bears had, at some point, something to cheer about. Nonetheless, at the end of the week when the health of the index was at risk due to a negative Jobs report, the bulls were able to generate what has to be considered a decent to strong positive close as well as a spike low rally that is likely to generate further upside this coming week.
The bears had the DOW teetering and on the verge of negating the breakout above 10594 that had been seen on Monday off of a positive ISM Index report. Nonetheless, they were unable to deliver a killing blow late in the day and allowed the bulls to generate an intra-day rally that not only went above the early morning highs, but closed above a strong weekly close resistance at 10618, giving the bulls once again the upper hand in spite of the negative economic news.
On a weekly closing basis, resistance is decent at the 200-week MA, currently at 11054 and strong at the 23-month high weekly close at 11204. On a daily closing basis, resistance is decent to strong at 10725, minor at 10897, and major at 11205. On a weekly closing basis, support is minor at 10428 and again at 10329. Below that, support is minor to decent at 10012, decent at 9932 and strong at 9686. On a daily closing basis, support is minor at 10636, decent at 10466, and decent to strong at 10098. Below that level, there is minor to decent support 9816 and strong at 9686.
The DOW on Friday tested the 100-day MA, currently at 10525 (got down to 10515), and not only held the line but generated a strong rally intra-day that likely created an important short-term spike low. The rally was totally unexpected as no news came out late in the day that would have caused the rally to occur. Nonetheless, there was some mention on Friday that the "continuing" negative Jobs creation numbers could force the Government and the Fed to come up with a new stimulus package, and that might have been the reason for the rally. It is surmised that some mention to that effect could come out this week when the FOMC meeting meets on Tuesday.
Due to the possibility that something positive could be mentioned at the FOMC meeting on Wednesday, as well as the spike low seen on Friday, it is likely that for the next day and a half that further upside action could be seen in the DOW. Resistance is still seen at 10730 (10725 on a daily closing basis) but based on Friday's spike as well as on the trading range, and considering that the 10601 level might be intra-day support a rally up to 10755 could be seen. Evidently if the 10730 level gets broken and a close above 10725 occurs, new buying is likely to come in. If that happens, it could cause the DOW to move up to test the 200-day MA, currently at 11050.
Once again, as was the case all week, the 10601 level is likely to be support as well as a pivot point for the DOW the first couple of days of the week. Breaks below that level will likely take the index back down to Friday's low at 10515 and negate the positive strength of the spike low. As such, the traders are likely to defend that level strongly until the FOMC meeting minutes are reported at 2:15pm on Tuesday.
Based on last week's trading range (10702 to 10469) and on the close in the upper half of the trading range, it is expected that higher highs will be seen with a good possibility of the DOW seeing a low of 10601 and a high of 10833.
NASDAQ Friday closing price - 2288
The NASDAQ continued to under-perform the other indexes suggesting that the rally is not market-wide as it was last year. With many questions regarding the health of the economy still unanswered, but showing positive signs of recovery, it is evident that investors are flocking to buy mainly Blue-chip stocks and keeping general stocks under careful scrutiny. Such a shift in selective buying is likely to keep the market on edge and with low volume participation.
Contrary to the other indexes, the NASDAQ was unable to close above its June 14th weekly close, suggesting that the resistance levels in the index are holding up well. In fact, it needs to be mentioned that those June 14th highs were not even close to being tested this past week.
On a weekly closing basis, resistance is decent to strong between 2310 and 2317. Above that level, resistance is minor at 2347, decent at 2453, and major at 2530. On a daily closing basis, there is decent resistance at 2303/2304 and strong at 2310. Above that level, there is decent to strong resistance at 2320 and then nothing of consequence until 2425. On a weekly closing basis, support is minor at 2255 and decent between 2219 and 2229, minor at 2179, and decent to strong at 2141. On a daily closing basis, support is very minor at 2284 and minor to decent at 2252. Below that, there is decent to strong support between 2179 and 2196.
It is evident that the lack of strong buying in the NASDAQ is keeping the traders unsure of the future direction in the indexes. Nonetheless, the index did recover on Friday after breaking below the 200-day MA (currently at 2265) and closed near the highs of the day, suggesting that follow through to the upside will be seen this week. The upside objective is likely to be the intra-week highs seen in January at 2326. Nonetheless, the most recent high at 2341 (seen in June) is not likely to be at risk of breaking unless some further positive fundamental news comes out. On a weekly closing basis, though, the 2310/2317 area is also likely to hold firm.
It is important to note that the NASDAQ is the "only" index presently trading above the 200-week MA, and on that technical basis alone the index should have been once again the leader and not the laggard it has been. That fact alone should keep the traders very wary of the action seen recently in the market.
On the other side of the coin, should the NASDAQ be able to get above the high made in June at 2341, there is absolutely no resistance until the high 2400's are reached (2473 to be exact). As such, any break above 2341 will likely convince the traders that the indexes are back into a bull-trend and bring in new and strong buying. On the downside, though, the 200-week MA, currently at 2222 continues to be a major pivot point and if broken on a weekly closing basis, the index and the rest of the market should fall rather strongly.
On a shorter term basis, a break below Friday's low of 2254 could be a catalyst for such a drop to begin to occur.
Having closed on Friday at 2288, means that the NASDAQ is likely in the middle of breakout or a breakdown as moves below 2250 will be negative, while rallies above 2326 positive. That is exactly 38 points in either direction. It puts the index as the most likely "weather vane" for the market.
SPX Friday closing price - 1121
The SPX seems to be in the middle between the DOW and the NASDAQ having been able to close above its June 14th high weekly close at 1118 (as the DOW did) but failing to get above the same week's high at 1131 (as the NASDAQ did). The mixed signals suggest that the follow through this coming week could be limited and not as strong as Friday's action suggests it will be.
The SPX got up to the 100-day MA, currently at 1125, on Monday of last week and for the next 3 trading days the index traded up to the line but was unable to break above it. This is in stark comparison with the DOW having broken above the line on Monday and trading above the line all week, and the NASDAQ never getting anywhere close to the line and in the process breaking below the 200-day MA intra-day on Friday. This fact alone suggests that the SPX may be the index to watch this week for direction.
On a weekly closing basis, resistance is minor at 1136 and strong at 1145. Above that level, resistance is major at 1217. On a daily closing basis, resistance is minor at 1127 and strong at 1110. Above that level, minor to decent resistance is found at 1172 and major resistance between 1202 and 1217. On a weekly closing basis, decent to strong support is found at 1065/1066 and strong support at 1023. Below that level there is decent support at 1014 (100-week MA) and decent to strong at 1000 (psychological support). On a daily closing basis, support is decent at 1102 and then nothing until decent to strong support is found between 1065 and 1070. Below that level, there is decent support at 1050 and strong at 1023.
The financial industry showed a bit more strength this past week with positive earnings reports on stocks such as AIG as well as strong rallies in stocks such as GS. In looking at those charts, further upside seems likely to be seen this week. If that happens, it is likely the SPX will be able to break above its June 14th high at 1131 and generate a rally up to the strong resistance at 1150. Nonetheless, in order for that to happen, the index must also break and close above the 100-day MA, currently at 1125, and it was unable to do so all last week in spite of good news.
Due to the spike low seen on Friday as well as the close in the upper half of the week's trading range, the SPX should show follow through to the upside on Monday. The spike low should work as a rubber band and thrust the index not only above the 100-day MA, but also above last week's high at 1129, and in the process above the 1131 level as well. If all of that happens, the objective would immediately become a rally up to the strong resistance at 1150. On the downside, though, a break below Friday's low (also the low of the week) at 1107 would be considered a negative. Any daily close below 1100 would be strongly negative as well as generate a sell signal.
Probabilities favor the upside, but it is interesting to note that the 200-day MA, currently at 1115, has to be considered the important pivot point this week and if the index gets back down to 1115 on Monday, the upside objective of the spike low would only be 1131. As such, all eyes will be on the SPX this week, seeking some clear direction as to what the market will do.
An unexpected rally as well as a spike low on Friday after a negative Jobs report has made figuring out this coming week's action mystifying. In addition, the mixed signals being given in the 3 indexes further complicates matters, as there is no clear collaboration as to direction being seen. Friday's action does suggest, though, that follow through will be seen on Monday, likely taking all the indexes at least up to last week's highs.
Though Monday's action will likely be closely monitored for direction, it is unlikely that anything will be defined until after the minutes of the FOMC meeting come out Tuesday at 2:15 pm. Not only are there mixed signals being given in the indexes, but also in the economic reports and until those get clarified some more, traders are unlikely to be aggressive in either direction.
By the same token, there seems to be a general feeling stating that bad news is to be ignored and that things will "continue" to get better. Until such a time that some "dramatic" catalyst comes out saying otherwise, the probabilities will favor further upside.
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Stock Analysis/Evaluation
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CHART Outlooks
In looking at the action this past week as well as the charts of about 80 different stocks, the conclusion is that there are very few trades, if any, that have a high probability ratings or good risk/reward ratios, other than some of the stocks recently mentioned and currently held.
There are only 2 mentions this week. One is a sale and one is a purchase. In both cases, these stocks show clearly defined support/resistance levels and decent risk/reward ratios. In both cases, these stocks are more likely to move on their own charts than on anything the indexes may do.
SALES
NTES - Friday closing price - 38.91
NTES has jumped up in price during the past 12 weeks from a low of 26.15 to the previous week's high at 40.13. The jump in price has mainly occurred because of the increase in popularity of new internet games that have recently been unveiled in China. The company manages online resources where these games are played. As such, the company benefits from increased participation of any new games that are popular.
NTES has now recouped 60% of the drop seen but has reached a level of resistance that will not be easy to break. During the last 10 months the stock has shown the $40 level to be an important pivot point where both support and resistance have been proven to be strong. Having rallied without any kind of meaningful correction, the probabilities now favor a small correction phase during the next 10 trading days before the earnings report comes out.
On a weekly closing basis, resistance is strong between 39.80 and 40.68. Above that level, there is no resistance until minor resistance is found at 44.06 and major resistance at 45.24. On a daily closing basis, resistance is decent at 39.89 and decent again at 41.27. Above that level, there is decent resistance again at 41.90 and at 42.35. On a weekly closing basis, support is minor to decent at 36.63, minor at 33.53, and decent at 32.50. Below that level, strong support is found at 30.15. On a daily closing basis, support is decent between 36.58 and 37.20. Below that, there is decent support at 36.20 and then nothing until minor to decent support is found at 35.10. Decent to strong support is found at 32.50 and then strong support between 38.92 and 29.68.
During the past few weeks the mood in the online gaming industry in China has turned strongly positive and it is possible that the bears have been squeezed out of their short positions due to the inexorable climb upward. Talk about further upside permeates everywhere and it is difficult to find bears at this time. This scenario could be a "two-edged sword" as it could also mean that all the good news might be factored in already. NTES 2 weeks ago got up into the strong resistance level at $40 with a rally up to 40.13 and this past week the stock tested that high with a rally up to 40.08 and a close at 39.87. Nonetheless, the stock did close lower on Thursday and confirmed the retest of $40 as successful with a second red close in a row on Friday. Such action strongly suggests the stock will have problems breaking above the $40 level without some additional good news.
NTES does not show any close-by support as the recent rally from 36.58 was straight up. That also means that if the bulls find that the stock is going to have problems breaking above $40, a drop back down to the $36 could be swift. The stock does show the 200-day MA is currently at 36.00 and drops down to that level are highly likely if no further upside is seen this coming week. It must also be mentioned that on the weekly chart the stock shows a straight up rally over the past 3 weeks from 32.84 and other that older support from October 2009 found between 35.42 and 36.15, there is also no support seen until the stock gets back to its initial rallying point.
Resistance is decent to strong between 40.13 and 40.55 and it is unlikely that level will get broken without further good fundamental news. NTES does report earning on August 18th and it is possible that a corrective phase might occur before that for no other reason that getting rid of the overbought condition that presently exists.
Sales of NTES between 39.40 and 40.00 and using a stop loss at 40.65 and having an objective of 35.42 will offer a 4-1 risk/reward ratio.
My rating on the trade is a 3 (on a scale of 1-5 with 5 being the highest).
PURCHASES
VALE Friday closing price - 29.00
VALE broke above a decent weekly close resistance level at 27.35 3 weeks ago and on Monday of this past week the stock also broke and closed above both the 100 and 200 day MA's giving notice that the stock is likely to continue upward at this time. In addition, the stock is showing a small breakaway/runaway gap formation that is doubly strong as the runaway gap came as the stock broke above the MA's this past week.
It must also be mentioned that VALE broke and closed above a 12-week high at 28.40 last week and is now likely to attempt testing the recent 2-year high at 34.71. In addition, the stock has built a strong support level over the past 12 weeks in which the 200-week MA was tested successfully on several occasions. Staying above the 200-week MA for a period of 12 weeks in spite of weakness being seen in both the stock and the indexes suggests the stock has built a very strong support level and will be working higher for the next few weeks.
On a weekly closing basis, there is minor psychological resistance at $30. Above that, there is decent resistance at 31.48 and strong resistance at 33.95. On a daily closing basis, there is decent resistance between 29.38 and 23.58. Above that level, there is decent resistance again at 31.42 and then nothing until 34.55 is reached. On a weekly closing basis, support is minor to decent at 27.71, decent between 25.54 and 25.74, and strong at 24.34. On a daily closing basis, support is minor at the 200-day MA, currently at 28.40, and strong between 27.44 and 27.50. Below that level there is strong support down at $25.
Based on daily closing price, VALE spent close to 2 months trading between 25.00 and 27.50. As such, the recent breakout from that trading range 6 trading days ago has to be considered indicative of further upside. The stock will find decent resistance at the $30 level and it is possible the stock will spend some time trading between $27.50 and $30.00 for the next few weeks. Nonetheless, on the weekly chart, the stock shows no resistance until a left shoulder high at 31.96 is reached and also shows good support at the breakout point at 28.40. As such, there the trading range could be 28.40 to 32.00.
On the downside, the breakout level at 28.40 is likely to offer good support, especially since the 200-day MA is also currently at that level. In addition, the stock does show a breakaway/runaway gap formation with the runaway gap being between 28.22 and 28.26. As such, the support area around the 28.40 has to be considered strong.
To the upside, the $30 level does present some problems as there are a total of 2 previous highs and 3 previous lows around 30.00, making that level decent resistance. In addition, the stock is showing a breakaway/runaway gap formation to the downside still in place with the breakaway gap being 32.20 to 31.92 and the runaway gap being 29.88 to 29.78. Such a runaway gap to the downside does give additional strength to the resistance just below $30. By the same token, if the stock is able to close the runaway gap at 29.88, the probability of the breakaway gap up at 32.20 being filled is high.
Purchases of VALE between 28.40 and Friday's closing price of 29.00 and using a stop loss at 28.23 and having an objective of 31.92 will offer a 4-1 risk/reward ratio.
My rating on the trade is a 3 (on a scale of 1-5 with 5 being the highest).
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Updates
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| Updates on Held Stocks
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Closed Trades, Open Positions and Stop Loss Changes
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| NUAN was unable to close above an important weekly close resistance at 17.40 (closed at 17.34), leaving things in limbo until the indexes decide what to do. Nonetheless, the stock did close near the highs of the week and further upside seems likely. Strong intra-week resistance is found at 17.85 and as long as that level is not broken, it can be said the stock will continue to move sideways between $15 and $17.50. It must be mentioned, though, that the stock now shows 6 weeks in a row with higher lows than the previous week and yet in spite of that nothing of consequence to the upside has been accomplished. With the stock at these high and decisive levels, it seems safe to say that something will be decided by the end of the week. Any daily close above 17.55 will likely cause a rally up to at least the recent high at 18.55, while a break below 17.00 will likely generate further downside and a move down to $15. DCTH did not have a very positive week going below last week's low by only a few points but failing to get anywhere near last week's high. This suggests that the chart is set up for some additional downside, at least on an intra-week basis. Nonetheless, the stock did not break any important support levels this past week and for that reason alone, the expectation of downside cannot be confirmed. The stock was very successful in staying above, both intra-day and on a daily closing basis, the 200-day MA, currently at 7.50. Nonetheless, with Wednesday's rally to 8.40 it can be said the recent high at 9.17 has been tested successfully, and with the repeated drops back down to the 7.50-7.57 level over the past 6 days (3 retests), the odds of the stock dropping down as low as 6.84 this coming week have increased. Any rally above 8.40 would negate the downside probability, but a drop below 7.50 would likely confirm it. Nonetheless, the weekly chart states that the recent up-trend is intact, even if the stock drops down to 6.86. DD broke above its 22-month high at 41.45 on Monday with a "runaway" gap and went on to confirm the breakout with 5 subsequent daily closes above that high. In addition, the stock on Friday, when the indexes were under selling pressure, did generate a drop back down to 41.47 that could end up being considered a successful retest of that breakout level if the stock can stay away from that low on Monday. On a negative basis, though, the stock does show a negative reversal day on Friday having gone above Friday's high as well as below Friday's low, and closing in the red. On a positive note, the stock did close in the upper half of the day's trading range and that suggests further upside on Monday. A break above Monday's high at 42.66 would re-stimulate new buying and further upside. A break below Friday's low at 41.47 would be considered a negative and likely take the stock down to test the runaway gap between 40.90 and 41.05. Stop loss should be at 40.91. HPQ got some unexpected news at the close of trading on Friday that sent the stock down to the $41 level in after hours trading. The CEO of the company was accused of sexual harassment and ended up resigning from his post. The stock closed on Friday AH at 41.85 and the last trade on the board was at 8:00pm Friday at 42.59. Based on this piece of news, it is impossible as of this writing to give any kind of a chart opinion on this event. I will follow up with a chart comment on Monday on the board. IR has traded sideways for the past 2 weeks unable to make up its mind on which direction the stock wants to go from this moment on. Nonetheless, the stock continues to be in a short-term weekly uptrend closing higher this week than last week by a small amount. On a bullish note, though, the stock has built a flag formation over the past 10 trading days that if broken (a break above 38.37) would likely thrust the stock not only up close to the $40 level but actually give an objective of 40.98. By the same token, a break below the bottom of the flag at 36.78 would likely push the stock down to the 35.00-35.60 level. Probabilities favor the upside and if the indexes show s strength on Monday, it might be wise to liquidate the short positions. ORCL was able to negate the negative news regarding the lawsuit from the government and generate a higher weekly close than last week. Nonetheless, the recent weekly high close and successful retest of the highs at 24.50 held up leaving questions still unanswered on both sides of the coin. On Friday, the stock traded below the 100-day MA, currently at 24.15 and even got close to the 200-day MA, currently at 23.80 with an intra-day drop down to 23.90. Nonetheless, the stock was able to reverse the intra-day weakness to close above the 100-day MA and near the highs. As such, it is likely that some follow through to the upside will be seen on Monday. The stop loss should continue to be at 24.70 as a break of the most recent high at 24.68 will likely take the stock up to the 25.64 level. The probabilities now favor the bulls. Nonetheless, any drop below Friday's low at 23.90, and especially if the stock gets below 23.80, would likely negate the recent bullish trend and put the stock back on a negative note. RIG generated a buy signal when the stock closed above the 10-week weekly high close at 54.61 (closed on Friday at 57.11). The stock did this with what looks like a breakaway gap on Thursday from 54.63 to 55.15. On Friday, when the indexes were under selling pressure, the stock got down as low as 55.50 but buying came in at that price taking the stock back up even before the indexes recovered. Such action suggests that further upside will be seen this week. On a weekly closing basis, there is minor resistance at 60.15 and on a daily closing basis at 59.71. Nonetheless, it is now highly probable the $60 level will be seen this week, though on an intra-week basis there is no resistance until a previous intra-week high at 63.89 as well as the 100-day MA, currently at 64.00 are reached. Any close above 60.15 on the weekly chart, will likely thrust the stock up to the 73.50 level where the 100-week MA is currently located. Support should now be strong at the previous daily high closes between 54.61 and 54.70. MMM generated a red close on Thursday that once again could signal a successful retest of the 34-month daily closing high at 89.81. Nonetheless, on the weekly chart the stock still maintains its short-term upward trend closing higher than last week. Resistance on the weekly closing chart is strong at 88.67 and on the daily chart at 89.81. The $90 level has proven to be very strong resistance since 2004 and though the stock may trade sideways to possibly slightly higher over the short-term, the probabilities of the stock going back down to the $68-$73 level at some point are high. The stock did close a probable runaway gap down at 86.35 on Friday making the breakaway gap between 83.11 and 83.65 a magnet should any weakness be seen. Nonetheless, the stock shows a spike low on Friday, much like the indexes, and it is possible that some follow through to the upside will be seen this week. On the weekly chart, the stock shows a decent intra-week resistance at 88.79 that could be an objective if the stock follows through this week. RHT once again made a new 10-year weekly closing high this past week and the trend is likely to continue as the chart shows no resistance whatsoever until minor intra-week resistance is seen at 36.00. On the daily chart, the stock once again successfully retested the previous breakout level at 32.00 with a close on Tuesday at 32.04 followed by a new daily closing high at 33.83. The stock is on a breakout of consequence and should continue going higher even if the indexes falter.
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1) DCTH - Averaged long at 6.555 (2 mentions). No stop loss at present. Stock closed on Friday at 7.99.
2) AMZN - Shorted at 126.79. Covered shorts at 128.10. Loss on the trade of $131 per 100 shares plus commissions.
3) HPQ - Shorted at 45.30. No stop loss at present. Stock closed on Friday at 41.85.
4) ORCL - Averaged short at 23.79 (2 mentions). Stop loss at 24.70. Stock closed on Friday at 24.38.
5) DD - Shorted at 41.28. Averaged short at 37.33. Covered shorts at 41.55. Loss on the trade of $1254 per 100 shares (3 mentions) plus commissions.
6) RHT - Purchased at 32.60 and at 33.40. Averaged long at 33.00 (2 mentions). Stop loss at 31.78. Stock closed on Friday at 33.45.
7) MMM - Shorted at 87.70. Stop loss at 90.62. Stock closed on Friday at 87.29.
8) AXP - Covered shorts at 42.67. Averaged short at 41.255. Loss on the trade of $283 per 100 shares (2 mentions) plus commissions.
9) IR - Shorted at 38.05. Stop loss at 38.47. Stock closed on Friday at 37.58.
10) MMM - Shorted at 87.32. Covered short at 87.55. Loss on the trade of $23 per 100 shares plus commissions.
11) SNDA - Shorted at 42.35. Averaged short at 41.42. Covered shorts at 43.36. Loss on the trade of $388 per 100 shares (2 mentions) plus commissions.
12) MCD - Covered shorts at 71.66. Shorted at 69.59. Loss on the trade of $207 per 100 shares plus commissions.
13) BA - Shorted at 68.92. Covered short at 69.85. Loss on the trade of $93 per 100 shares plus commissions.
14) AIG - Covered shorts at 40.95. Averaged short at 37.53. Loss on the trade of $686 per 100 shares plus commissions.
15) DDM - Covered shorts at 45.42. Shorted at 44.23. Loss on the trade of $119 per 100 shares plus commissions.
16) DD - Purchased at 41.21. Stop loss at 40.90. Stock closed on Friday at 42.13.
17) RIG - Purchased at 55.65. Stop loss at 54.50. Stock closed on Friday at 57.11.
18) IR - Shorted at 37.88. Covered shorts at 38.05. Loss on the trade of $17 per 100 shares plus commissions.
Previous Newsletters
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Encyclopedia of Chart Patterns. A must have for chart aficionados! |
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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