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Issue #37 
September 16, 2007 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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| Lack of direction rules!
DOW Friday close at 13442
The DOW traded all last week within a clearly defined trading range and failed to give a clue as to what it will do this week. Based on the anticipation that the FED will be lowering rates this coming week the DOW closed near the top of the recent trading range. A ¼% interest rate cut has now been fully built in to the current price and should not cause the indexes to go much higher unless there is a surprise. There is a school of thought that the FED will be more aggressive in trying to correct the fallout from the sub-prime debacle and lower interest rates as much as ½ percentage point. Should that happen it is probable that the DOW will rally up to the 13691 major resistance area.
In looking at the weekly chart of the DOW it must be said that there is a high probability of a spike in both directions. This means that a rally up to the 13691 and a drop to 12795 seem to have a good probability of both happening. Overall, though, the weekly chart is slightly slanted toward the downside and it seems that a lot more work on re-tests and building of supports is needed before the upside can be considered on a trend basis.
Presently the 50 and 100 day MA are currently right at 13422 and since the DOW closed above that level on Friday it could mean the spike up will come first. There is decent resistance at 13500 but above that there is nothing until the 13691 level of major resistance is seen. It is important to note that it is unlikely that the DOW will be able to get above 13500 unless the rate cut is higher than anticipated. A rate cut of ½% will likely generate the move up to 13691 but failure to get above that level would be seen negatively on a chart basis.
Support should once again be strong at 13250. That level has proven to be important in the past. In addition, the 20-day MA is currently at that price as well. A break of that level will generate a move back down to the 13000 level. Since the chart already shows a double bottom at the 13030 level another move down to that price would likely generate a break and a drop down to 12795.
My chart evaluation seems to point to a trading range market over the next few weeks between 13691 and 12785 but if there are any surprises I would tend to think they would be to the downside. The 13691 level, though, is critical to any upside movement. In looking at the monthly charts and going back 20 years the 13691 level seems to stand out as resistance in all charts.
Right now, though, the charts seem to be waiting for the fundamentals to unfold or become clearer before chart trading starts to crank up again.
NASDAQ Friday Close at 2602
The NASDAQ chart actually looks better than the DOW chart and it seems like the leadership of the indexes may have shifted. The resistance levels in the NASDAQ are nowhere near as strong as the DOW. In addition, the drop down to the 2386 level a few weeks ago was a successful re-test of the 20-month MA and it looks highly unlikely that a break of that level would happen under the present circumstances, even if the DOW breaks its major support.
Having said that I do believe the NASDAQ will continue to outperform the DOW on the upside and under perform on the downside.
The 2426 level seems to be a pivotal point and the recent high at 2644 will act as decent resistance. A break above 2644 will likely generate a rally up to 2688 to fill a gap that is still open. If the FED rate cut is ½% a rally to that level will likely happen. On the downside 2566 seems to be a pivot point as well. A break of that level would likely generate a move down to 2534. The 2500 should now be considered major support but if broken I do not believe the 2386 would be at risk.
The NASDAQ chart is slightly slanted toward the upside, contrary to the DOW, and any weakness that comes into the indexes should be less pronounced.
S&Poors 500 Friday close at 1484
The SPX chart looks eerily alike the DOW chart as far as a spike on both directions being a high probability. There is very decent resistance at 1490 from the 20-week MA as well as from a previous high, nonetheless, a lowering of the interest rates by the FED will likely generate a move above resistance and a probable rally up to the 1531 level. The 1531 level, though, is likely to prove very difficult to break. In looking at the 10-year monthly chart it seems highly improbable that under the current fundamental picture that the SPX would be able to re-test the 1555 double top that is currently in existence.
A failure to get above that level (1531) will discourage the buyers and encourage the sellers and a spike down to the 1410 level would likely ensue. This range (1530-1410) seems to be clearly evident using the 10-year monthly charts. It also means that it will take at least 2 months or more for the index to accomplish both objectives thus putting the SPX into a sideways trading range until the end of the year at least.
On a short-term basis the 1490-1496 is an evident pivot point with both the 50 and 100 day MA coming into play at both of these levels. A daily close above 1496 should cause the index to trade with strength for the next week or two. On the downside the 1465 seems to be a pivot point as well. A break of that level will likely generate a spike down to 1412. With both these pivot points clearly defined it should not take long to see where the indexes are headed for the next two weeks.
It is very evident that the strength this past week is based on the anticipation of an interest rate cut, which could happen as early as this week. It is therefore also evident that the charts will not play much of factor until the news is out, one way or the other. Since a ¼% interest rate cut has been already factored into the index prices I would tend to think that such a cut would be viewed more negatively than positively.
A larger interest rate cut would be a strong positive but only under the chart parameter mentioned above. Either way I do believe the indexes will weaken substantially before the end of the year. Not to the tune of going below the lows seen a few weeks ago but certainly to the tune of going below the recently built support levels. Strong rallies in the indexes should be seen as good selling opportunities.
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Stock Analysis/Evaluation
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CHART Outlooks
Due to the muddled fundamental picture of the indexes as well as a widely defined chart outlook stocks should be evaluated on their own strengths and weaknesses but with a slight slant toward the downside.
FTEK (Friday Close at 23.67)
FTEK reached a major support level, on all charts (daily, weekly, and monthly) with the break down to 22.50 and bounced up from it. There is some decent resistance at the 24.10 level but it is from previous lows and if FTEK has reached its bottom will not likely be a major obstacle.
It is highly likely that FTEK will get into a trading range for several weeks or perhaps a couple of months while deciding what it wants to do long-term. The top of the sideways trading range will either be 27.40 or 29.60 so there is some nice room to the upside where profits can be made.
Due to the fact that the stock has been in a recent downtrend and looking weak it does not make sense to chase it so patience is required in waiting for an attractive entry point.
A drop back down to 22.90-23.10 has a fair chance of happening and I would enter the market then. Resistance will be found first at 24.10 (minor), 26.00 (50-week MA), 27.40 (strong and 20-day MA) and 29.70 (major and 20-week MA). Support is at 22.90-23.10 (minor), 22.50 (strong), and 21.50 (major). The support at 21.50 is a double bottom and should it be seen a third time is would likely break.
Purchases of FTEK at 23.10 and using a stop loss order at 22.40 and an objective of 27.40 would offer a 6-1 risk/reward ratio. If using 29.70 as an objective the risk/reward ratio increases to 9-1.
My rating on the trade is a 6.5 (on a scale of 1-10 with the strongest probability rating being 10).
GIGM (Friday close at 15.21)
GIGM has been in a 6-week straight move up since hitting its recent low at 9.02. Last week it got close to its all-time high at 16.42 with a rally up to 16.30 but was not able to continue and fell back to a decent support level at 15.15. The chart, though strong, looks unhealthy as no support level has been built or tested yet.
A correction at this time looks highly probable even if the stock is ultimately heading higher. The close on Friday at the 15.15 support level seems to point to a chart that will correct if broken. This same level was previously important on the rally up to the 16.42 all-time high. Intra-day rallies back up to the 15.80-16.00 are likely but without a daily close above 15.81 will likely spell out the beginning of a corrective phase.
There is some minor support at 14.15 but the strong support is found down at 13.60-13.70 and then again at 12.80. The 20 and 100 day MA are currently crossing down at 13.62 and the 50-day MA is down at 12.82. Though the daily charts seem to give strong support to the 13.70 level, the weekly chart seems to have the 12.50-12.80 as "the" objective of a corrective phase.
Sales of GIGM between 15.80-16.00 and using at stop loss at 16.52 (new all-time high) and an objective of 13.70 will give at least a 3-1 risk/reward ratio. If 12.80 is the objective the risk/reward ratio increases to over 5-1.
My rating on the trade is a 7 (on a scale of 1-10 with the strongest probability rating being 10).
ARNA (Friday closing price 12.02)
This past week ARNA took a price tumble down to the 11.51 level. The following comment was given on Yahoo regarding the drop " Shares of Arena Pharmaceuticals Inc. traded sharply lower Tuesday as investors failed to show enthusiasm for an early positive safety update on the biopharmaceutical company's obesity drug." The news was not negative but the reaction was and it simply means a good opportunity to enter the stock at a great entry point.
Since November of last year ARNA has been in a defined sideways trend with a slight but evident up-trend in construction. The top of the trading range has been the 14.75 level and the bottom of the trading range has been consistently increasing with the $9, $10, $10,50, and $11.00 levels taking their turns in becoming strong support. This past week ARNA dropped as low as 11.50 and if you look at the support level trend shown above it is highly likely that another higher support level is now in effect.
With the lows consistently getting higher and the resistance level continuing to hold at 14.75 a pennant type formation seems to be in the offing and a breakout above 14.75 could be explosive.
Nonetheless, at this moment a good buying opportunity seems to be presenting itself. Support will now likely be found at 11.66 and purchases near that price should be attempted. There is some minor resistance at 12.84 but above that nothing until the 14.25 level is seen. The MA's cannot even be factored in as ARNA has been trading both above and below them consistently over the last 9 months without any reaction.
A purchase of ARNA between 11.70-11.80 and using a stop loss order at 11.40 and an objective of 14.75 will give a risk/reward ratio of 8-1. There are now 3 tops at the 14.75 level and therefore the probabilities of a break of that resistance have increased strongly. The 11.50 support level has not yet been confirmed, though it is now a high probailitiy, so you may want to consider putting the stop at 10.90, just below the last confirmed support level at 11.00.
My rating on the trade is an 8 (on a scale of 1-10 with the strongest probability rating being 10).
ININ (Friday closing price 18.19)
ININ is almost a perfect trade at this price as the support level is clearly defined and the stock can be played on both sides of the coin for a nice move in either direction.
Presently there is a double top at the 23.00 level and major support down at the 18.00 level. It is probable that ININ will be in this trading range for the next few weeks and therefore appears to be a good purchase at this price. Nonetheless should the 18.00 level give way there is no support until the 15.50-16.00 is seen so a break of 18.00 could turn into a fast $2 move down. On the upside the first resistance level is 19.60. This is from the 20-week MA as well as from a recent high. Above that level the 20.32 area with the 50-day MA will be seen as resistance. The possible objective and strong resistance would be 21.54.
With ININ having closed on Friday near the $18 pivotal level this trade is almost a must-do.
Purchases of ININ should be made at Friday's closing level of 18.19 and placing a stop loss at 17.78 (below the lowest price since May 3 at 1784) and looking at an objective of 21.54 gives this trade a 6-1 risk/reward ratio. Even if only the minimum rally up to 19.60 is seen the risk/reward ratio would be almost 4-1.
In my opinion the stop loss order at 17.78 should be a reversal of position. A break of 17.84-17.88 support will likely generate a move down to support at 16.00 and likely down to 15.55 to close a gap that has been left open. If a short is instituted on the stop loss at 17.78 then a stop loss on the upside at 18.10 should be placed. The downside objective of 15.55 would give a 7-1 risk/reward ratio under that scenario.
My rating on the trade is 7 on the upside and an 8 on the downside should the support level break. This is on a scale of 1-10 with the strongest probability rating being 10.
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Updates
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| Update on held stocks
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Status and stop loss changes
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NUAN went down and tested the 50-day MA with the drop down to 18.00 on Friday. The weekly close at 18.26 also coincided with a semi important daily close at 18.30. It looks like the worst is over for the meantime and a rally back up to resistance at 18.87 will occur this week. If NUAN is able to get above the 18.87 level it should rally to close the gap up at 19.51. There is very decent resistance level between 19.45 and 19.67 that I do not believe will be broken at this time. I am planning on taking profits on the positions purchased recently at 18.35 if the rally does occur. It's still to early to tell but it seems that the $20 level for NUAN will be difficult to get above in the short-term and drops down to the $17 thereafter are possible PMCS continues to trade in no-man's land with no short term direction in view. The weekly chart does seem to lean toward the up-trend continuing but at this moment this stock has stalled totally. Patience is what is needed. INTV has no intra-day resistance until the 9.07 level is seen but on a daily closing basis the 8.76 level will be difficult to close above. Support is now major down at 8.00. A close above 8.76 will likely generate a move up to the 9.38 level even though the 9.07 intra-day high will have some say on that. I do not see this stock being able to get above the 9.38 level on a closing basis for a few months so profits should definitely be taken on such a rally. I believe INTV will likely trade between 8.00 and 9.38 for the next few months. WOLF seems to have reached its low end with Friday's drop down to 12.93. Any further weakness from here would look badly on the chart. A rally back up to the 14.73 now seems to be probable. After that I do not have a clear picture. FCEL closed Friday below the breakout level of 9.11 but only by 4 ticks which does not confirm a break. The daily chart does show a good possibility of further weakness down to the 8.46 level where the 100-day MA is currently at. Overall, though, the trend is intact and further upside is expected. SPIL continues to maintain itself above the 10.40 and as long as that continues it is probable that a rally up to the 11.38-11.54 level will occur. The ability of the stock to hold the recent gains increases the possibility of a re-test of the 12.14 all-time high and a new high. ABC closed on Friday below the 100-week MA and having done this in the face of an index rally makes this stock a prime candidate for much further weakness. There is a very decent support level between 44.40 and 44.60 on a weekly closing basis but any further weakness from here would likely generate a drop down to the $41 level. The main objective of the short was reached on Friday and an exit strategy should be considered if there is no follow through to the downside on Monday. GPS filled the gap on Thursday but failed to follow through on the upside and closed below the 18.20 pivot point making the close slightly slanted toward the downside. An inverted flag formation still is in place and a break below 17.50 will likely generate a move down to the 15.87-16.10 level where taking profits should be considered. CLDN looks absolutely weak and Friday's closing price of 13.73 was the lowest weekly closing price since January 16th. There is "minor" support at 12.70. The main objective is likely to be 11.50 as that was a major closing high made in the year 2000, MWA managed to rally on Friday and closed above the 11.85 previous breakdown level. This move up will remove some of the selling pressure as it gives the first indication that the stock may have found a bottom. Nonetheless in order to give a strong indication that the downside is over the stock needs to get above the 12.64 level. Even if that happens the likelihood of another drop back down to 11.85 still looms. Nonetheless a move above 12.64 should ultimately stimulate at least a move up to the 13.50-14.00 level.
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1) PMCS - Averaged long at 7.90. Stop loss removed. Stock closed Friday at 7.78.
2) INTV - Averaged long at 7.63. Stop loss raised to 7.90. Stock closed Friday at 8.69.
3) CEGE - Liquidated at 3.54. Loss on the trade of $47 per 100 shares (2 mentions) plus commission.
4) MT - Shorted at 67.54. Covered at 68.00. Loss on the trade of $46 per 100 shares plus commission.
5) SONS - Averaged long at 7.15 with 5 mentions. No stop loss at present. Stock closed Friday at 5.75.
6) SPIL - Long at 9.49. Stop loss raised to 10.34. Stock closed Friday at 10.71.
7) PAAS - Shorted at 25.83. Covered at 26.72. Loss on the trade of $89 per 100 shares plus commission.
8) MWA - Purchased at 12.24. Stop loss now at 11.79. Stock closed Friday at 12.20.
9) FCEL - Averaged long at 7.66. Stop loss at 9.00. Stock closed Friday at 9.08.
10) WOLF - Long at 13.82. Stop loss now at 12.83. Stock closed Friday at 13.09.
11) NUAN - Purchased at 18.35. Stop loss at 18.09. Stock closed Friday at 18.23.
12) GPS - Short at 18.81. Stop loss lowered to 18.40. Stock closed Friday at 18.00.
13) ABC - Shorted at 47.94. Stop loss lowered to 45.36. Stock closed Friday at 44.65.
14) CLDN - Shorted at 14.42. Stop loss at 14.54. Stock closed Friday at 13.73.
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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