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Issue #38 
September 23, 2007 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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| Preventing inflation or recession is the question now.
DOW Friday close at 13820
The DOW got a major push from the Fed with the ½% interest rate drop this past week. The move allowed the DOW to rally almost 400 points and set itself for an attempt to go above the all-time high made two months ago at 14022.
The rally went above a strong resistance level at 13691 but stalled when it tried to get up to the highest weekly close on the DOW at 13907. It was evident that going into the weekly close (Thursday and Friday) that the bears would aggressively defend that price level.
Though the lowering of the interest rates was positive and shows the Fed's desire to prevent a recession, it also shows that the sub-prime problem might be greater than originally expected and a cause of deep concern. The lowering of the interest rates may relieve those pressures "somewhat" but will create new concerns regarding inflation and may end up causing more problems for the stock market in the long run.
In looking at the weekly chart of the DOW this past week's rally needs to generate a new high in order for it to be confirmed. A failure to generate a new high anytime during the next two weeks will be viewed quite negatively and will probably cause the 13000 level of support to be broken and a drop down to the 12795 level.
The 13691 level must now be considered a major pivot point for the short term. Any daily close below 13678-13658 will deflate the rally and bring in strong new selling.
As it stands right now the daily chart looks quite positive and strength in the indexes should continue. The 13851 level, on a daily closing basis, is short-term resistance but must be considered minor. A break above that level would not be decisive but would be indicative that the DOW will be attempting to make new highs. A close below 13658 would be indicative and decisive that the rally and attempt at new highs is over. This means that for the first few days of the coming week the trading range, on a daily closing basis, may be 13678 to 13851.
It really is difficult to predict, on a chart basis, what is likely to happen because there is so much uncertainty overhanging the market. One thing for sure, on a chart basis, is that weakness below 13658 will put strong pressure and likely cause this past week's rally to disappear. Should that happen, the 13450 level would then become the new major pivot point.
NASDAQ Friday Close at 2671
The NASDAQ did not participate as strongly as the DOW in this past week's rally. During the past few weeks the NASDAQ had been the leader but now the DOW has caught up and both charts seems to be showing the same patterns.
The NASDAQ rallied this past week to the 2682 but ran right into the gap area (2682-2686) that had been left on the way down and was unable to close it. This was not a positive sign as the gap area did not have any other resistance and was not considered a major obstacle. The chart does show a possible small flag formation and if able to get above the recent high at 2682 could give an objective of 2754 and a new high above the previous high close of 2720. There is some minor resistance at 2688 so even if the gap is closed the index would still have to close above 2688 to confirm a re-test of the highs.
The NASDAQ does not have a major pivot point like, much like the DOW shows, and therefore the 2682-2688 level must be considered an important short-term level. If the gap is closed this next week and the NASDAQ is able to close above 2688 then its likely the highs will not only be tested but probably surpassed.
On the downside the 2582-2592 level is not only major support but a major pivot point. A move below that level would show the move up this last week to be a major failure and strong selling would appear.
As with the DOW the NASDAQ chart is now committed to making a new highs and if failure occurs would be taken quite negatively.
S&Poors 500 Friday close at 1525
The SPX for the last year has been the chart favorite in as much as it has been the most indicative on both the upside and the downside. It is therefore interesting to note that the SPX chart has a much clearer chart picture than any of the other indexes.
This past week's rally took the SPX right up to a very important resistance level at 1540. That same level proved to be a major resistance back in June and when broken allowed the SPX to go up to test its all-time intra-day high, made in the year 2000, at 1555. It is therefore evident that a break above the 1540 level will not only generate a rally back up to the 1555 all-time high but a likely new high being made.
On the downside, much like the DOW, the SPX also has an important pivot point at 1504. Breaks below that level will take the steam out of this rally and generate a drop down to the 1482 where all the MA's are presently located.
Since the SPX has the clearest chart of all it makes sense to keep a close eye on the action this next week.
The stock indexes in general are simply reacting to the news rather than anticipating what the future will bring. With such uncertainly overhanging the marketplace I believe momentum will play a larger role in price movement. It is entirely possible, based on last week's action, that a new highs will be made but if that happens it is also very likely those gains would be returned as fast with any negative news.
From a purely chart perspective I have to state that the indexes have set themselves up for a strong drop if they are unable to make new highs. Failure after commitment is a powerful force.
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Stock Analysis/Evaluation
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CHART Outlooks
The mentions this week are based on my own personal belief that the indexes will go down very soon, even if they are able to make new highs. Nonetheless the chart picture is quite muddled and sensitive to news, therefore entry points into short positions need to be monitored quite closely.
All my mentions this week are in stocks that are in overbought conditions and who have close-by resistance levels of consequence. If the indexes are rallying on Monday then wait to get involved in the short positions when at the most advantageous price is seen. In addition, take this week's mentions with a "grain of salt" as things are not clear, fundamentally speaking, in the marketplace.
PAAS (Friday Close at 28.76)
PAAS is a stock I shorted a few weeks ago at 25.83 and got stopped out at 26.72. As you can see the stock has continued to rally upward but has now reached a strong resistance point with the rally last week up to 29.30. The 29.42 level has proven to be an important price level on 16 different occasions over the past 9 months and needs to be considered a probable top to this rally. PAAS has now moved up almost $9 dollars in price over the past 5 weeks without any kind of significant correction and must be viewed as severely overbought.
From January through August of this year PAAS spent a large amount of time trading between 24.90 and 29.40 and due to the uncertainty in the indexes it is likely that trading range will again come into play. In addition, should the indexes fail to make new highs the sentiment would turn negative and selling pressure would come in to all stocks. The 20.80 low seen 5 weeks ago was never tested and if PAAS is able to break below the 24.90 support there are no major levels of support to stop the fall before approaching the lower $20's.
The attractive part of this trade is that the risk/reward ratio is quite good and very well defined.
Sales of PAAS between Friday's closing price of 28.76 and 29.40 should be attempted and a stop at 29.76 placed. Objective on the trade is a drop down to 24.90. Further objective would be a drop down to the 22.50-23.00 level. Risk/reward ratio, depending on the entry point, would be at least 4-1 and could be as high as 20-1 if the entry point is near 29.40 and the secondary objective is seen.
My rating on the trade is a 7 (on a scale of 1-10 with the strongest probability rating being 10).
AOB (Friday close at 10.75)
AOB is another stock that I recently shorted at 9.45 and got stopped out at 9.60. The stock has rallied back up to a strong resistance level found between 10.55 and 11.15 where 7 previous weekly closes in the past 9 months have been seen.
AOB, much like PAAS, has not had a weekly correction since the low at 6.83 was made back in August and is now nearing an area that has been shown to be strong resistance in the past. A corrective phase has a strong likelihood of occurring from this level. Since the high at 14.19 made in January of this year, AOB has been in a weekly downtrend that has not yet been broken. A rally above 11.85 would be needed to confirm the downtrend is over.
There is strong resistance between 10.90 and 11.23 on the daily chart and then major resistance at 11.85 (major weekly high). Support now can be found at 10.00 (from previous highs), at 9.20 (considered minor), and at 8.37.
Sales of AOB between 10.90 and 11.23 should be attempted and a sensitive stop loss at 11.36 placed. Objective of the trade is a drop down to the 8.12-8.37 level. Risk/reward ratio is almost 5-1. If a sensitive stop loss is not wanted then the stop loss can be placed above 11.85 as that would mean the downtrend is over.
My rating on the trade is a 6.5 (on a scale of 1-10 with the strongest probability rating being 10).
INAP (Friday closing price 15.10)
INAP is a stock that has been in a very evident sideways trading range between $13 and $15 over the past 4 months. There was one occasions when INAP traded as high at 16.15 but within two weeks it had dropped back down to 14.35. Using the weekly chart it can be easily established that the stock has been in a downtrend since January when it made a high of 21.25. Until the 16.15 level is taken out INAP continues to be in a sideways to downtrend.
There is strong support at the $13 level but below that, support is not found until the $9-$10 level is seen.
Much like the stocks mentioned above INAP has rallied straight up for the last two weeks from a low of 13.11 to Thursday's intra-day high at 15.42 and now finds itself at strong resistance and without any support for $2 on the way down. There are 5 lows around the $13 level and that has increased the chances that if INAP goes back down to that area that the support will break.
Over the past few months there have been many daily closes between 15.00 and 15.20 and with only one exception that level has proven to be difficult to get above. Friday's close at 15.10 seems to be a good price at which to short the stock and pick up a $2 move down.
Sales of INAP at Friday's closing price of 15.10 and placing a stop loss at 15.52 (above the recent high of 15.42) and looking for an objective of 13.10 will offer a 5-1 risk/reward ratio. It is highly probable that should INAP head back down to the $13 level it will break that support and drop down to the $10 thereafter. Risk/reward ratio should that happen would jump up to almost 20-1.
My rating on the trade is a 6.5 (on a scale of 1-10 with the strongest probability rating being 10).
XING (Friday closing price 11.27)
XING is a stock that has been hit recently with both negative as well as positive news. This past weeks rally up to Friday's closing price of 11.27 was caused by an upward revision of the company's earnings. The previous week's low was 7.74 and the stock looked like it was going to go lower.
The rally has taken XING up to a major resistance level at 11.54. Over the past 4 years the 11.23-11.54 has proven to be either a major resistance level or a major support level and must be considered an important pivot point for this stock. It is also important to note that the 20 and 100 week MA are presently at 11.34 and will also act as resistance.
On the negative side over a week ago a class action suit against XING was announced accusing the company of violations of SEC laws. This news came out on Friday Sept 14th but was overshadowed by Monday's Sept 17 announcement of revised higher 2nd quarter earnings.
With XING reaching a major resistance level it makes sense to attempt to enter the market on the short side as the risk/reward ratio is very good and the levels clearly defined.
Sales of XING between Friday's closing price of 11.27 and up to 11.54, placing a stop loss at 12.10 (above the high point since July 17th at 11.95), and looking for an objective of 7.95 and 8.07 (gap left open and re-test of recent lows) will offer a risk/reward ratio of at least 4-1.
My rating on the trade is 6 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 failed to close the gap at 19.67 and failed to even get up to weekly resistance at 19.45. This, in addition to a weak close was not positive. . Same scenario as my comment on the Thursday recap remains. The indexes may have a hand on what NUAN does on Monday but I am putting in a stop loss order at 18.54 to lock in some profit. As it stands right now the stock is looking weak on the chart. PMCS, in looking at the weekly chart, is at a pivotal price at the 8.20 level. The weekly up-trend continues intact and the chart is stating that weekly closes above 8.20 should generate more upside. Any weekly close above 8.47 will likely stimulate a rally above the $10 level. Any break below 7.21 will destroy the chart. It is possible that the stock will continue to trade in a narrow sideways range for another week or two but after that it should make a statement. INTV should now be seen as a short term sale as the upside objective has been reached and there is a major congestion area around these prices. Highest weekly close during the last 30 months has been 9.46. Stock closed Friday at 9.45. Intra-day rallies up to 9.70 may be seen but it's hard to imagine, in looking at the chart, that the stock will be able to get above this strong congestion area at this time WOLF is likely to have some problems at the 14.00 level and may pull back down to 13.21. In addition the 50 and 100 day MA are currently around 14.10 making that area difficult to get above at this point. Weekly chart still looks positive but the up-trend has been interrupted at this time. No reason to think it wont resume shortly but any break below the recent 12.75 low will be quite negative ARNA did not do anything special on Friday but held the previous week's close at 12.02 in check. Weekly chart looks very positive but the daily chart shows that a break below 11.50 would likely generate a strong move down. In addition the daily chart shows the possibility of an inverted flag formation and only a rally above 12.60 will negate that formation. Breaks below 11.50 would offer an objective of $9 when using the daily chart. MWA has given the first clear signal that the low has been made with a weekly close above 12.26. Nonetheless giving up so much of its intra-day profit on Friday was disturbing. The 12.00 - 12.20 level will likely be quite pivotal this week and if able to close next Friday above 13.08 another positive statement would be made. Resistance should be found at 13.75. ININ was not able to make any kind of statement other than to confirm that the 18.00 level is crucial. Friday's close at 18.56 was positive but not indicative. Any weekly close below 18.06 would likely signify that the stock is heading lower. A rally above 19.10 is needed to relieve some of the selling pressure. CLDN confirmed with the drop on Friday that the intra-week rally was not real. The weekly close was the lowest since January 2006 and seems to point to continuation of the downtrend. Nonetheless it managed to close slightly above the lowest daily close at 13.48 leaving the door open for it being a re-test of the lows. Any daily close below 13.48 this coming week will generate further downside. Stops should now be at 14.78. CRAY not only gave a second close above the 20-day MA but rallied up to the 50-day MA at 7.10. Any further movement to the upside will provide a short-term objective of 7.67. Support should now be found at 6.45. The weekly chart shows that a weekly close above the 7.67 level would likely cause a rally up to the $10 level to occur.
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1) PMCS - Averaged long at 7.90. Stop loss removed. Stock closed Friday at 8.19.
2) INTV - Liquidated at 9.00. Averaged long at 7.63. Profit of $274 per 100 shares (2 mentions) minus commission.
3) ARNA - Purchased at 11.71. Stop loss at 11.40. Stock closed Friday at 12.03.
4) ININ - Purchased at 18.19. Stop loss at 17.78. Stock closed Friday at 18.76.
5) SONS - Averaged long at 7.15 with 5 mentions. No stop loss at present. Stock closed Friday at 5.75.
6) SPIL - Liquidated at 11.29. Long at 9.49. Profit on the trade of $180 per 100 shares minus commission.
7) CRAY - Purchased at 6.05. Stop loss now at 6.39. Stock closed Friday at 7.01.
8) MWA - Purchased at 12.24. Stop loss now at 11.79. Stock closed Friday at 12.56.
9) FCEL - Liquidated at 9.00. Averaged long at 7.66. Profit on the trade of $134 per 100 shares minus commission.
10) WOLF - Long at 13.82. Stop loss now at 12.83. Stock closed Friday at 13.90.
11) NUAN - Purchased at 18.35. Stop raised to 18.54. Stock closed Friday at 18.75.
12) GPS - Covered short at 18.40. Shorted at 18.81. Profit on the trade of $41 oer 100 shares minus commission.
13) GIGM - Shorted at 15.80. Covered short at 16.45. Loss on the trade of $65 per 100 shares minus commission.
14) CLDN - Shorted at 14.42. Stop loss at 14.80. Stock closed Friday at 13.56.
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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