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Issue #88 
September 07, 2008 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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| Is the September Slide Over Already?
DOW Friday close at 11221
After a strong but failed attempt on Tuesday to break above the most recent high at 11867, with a rally up to 11790, the DOW took a downward spin of consequence and proceeded to drop 752 points in a matter of just 4 days. The collapse was impressive and in the process supports, painstakingly built over the past 5 weeks, were broken and the selling reached a panicked frenzy that threatened the lows made 7 weeks ago. Nonetheless, on Friday when things were looking their worst, after a higher than anticipated unemployment report, the DOW managed to find some support and was able to turn around and close on a positive note.
The questions will abound this coming week on whether the DOW re-tested the previous lows successfully and is now ready to start an up-trend or whether the downtrend has resumed and the bounce on Friday was simply weekend profit taking after a strong down move. The answer to that question will likely be answered this coming week.
It must be said that there are many small signals on the chart that point toward a successful re-test of the recent lows. Nonetheless, on the other hand, the powerful drop in price seen this past week is indicative of an index that is under severe selling pressure and lack of buying interest. The key might just be in the fact there was no major fundamental news that triggered the drop in price and it might end up being accredited to recently important support levels having been broken, and the triggering of stop loss selling.
On an intra-week chart basis, there is no resistance until the 11670 level is seen but that level is considered strong. On a weekly closing basis, though, resistance is decent at 11497 and much stronger at 11587. On a daily closing basis, the resistance is quite decent at 11384, and then nothing until 11584.On a weekly closing basis, support is very strong at 11101, minor at 11022 and 10892, and strong again at 10739. On a daily closing basis, decent support is found at 11131 and then very strong at 10963.
The longer-term monthly charts seem to say that a drop down to the 10700 level is still a high probability. In fact, even the weekly charts give that level a high probability as well. Nonetheless, the fact that the bears had the bulls on the ropes with a 752 point collapse as well as trading below 11101 intra-day on Friday (considered to be a breakdown point on the weekly charts) and then let them off the hook, has to be considered a possible clue.
It is evident that that based on Friday's action a case can be made for both the bulls and the bears and therefore the battle will continue this coming week. The bulls will try to confirm a successful re-test of the lows and the bears discredit or wave off the implications of the rally on Friday. I wish I could predict what the outcome will be, but the best I can do is state that in looking at charts of many stocks, it seems to me that the possibilities of an important low having been made on Friday are good.
Nonetheless, the question that really must be asked is whether the bear trend is still in effect or not, as it can be expected that any further weakness will cause panic selling and strong drops in price, as well as longer term damage to the stock market. A break of these supports would likely put the market into a tailspin that could generate moves in the DOW down to the 10,000 level. Such a scenario would mean recovery is still far away and that the market will be down the rest of the year. That is what I believe is at stake.
I do know that there are many highly respected analysts on both sides of the coin and that this will be a hot issue this week, likely to be followed with a lot of volatility. I am "leaning" toward the bull side on this at this time.
Probable trading range for the week is 11125 to 11587. Possible close next Friday is 11497. One possible clue to watch for, is a daily close below 11131. Such a close will put new pressure on the index and give new ammunition to the bears.
NASDAQ Friday Close at 2256
The NASDAQ was the worst performer of all the indexes this week and the 196 point drop from the highs to the lows of the week, the second largest weekly drop in 7 years. The only other weekly drop bigger than this one came the week of January 21st with a drop of 205 points. It is important to note, though, that the previous 205-drop was from a high of 2408 down to 2203 while this week's drop was from 2413 to 2217. The similarity in price levels seems to suggest that the outcome of the drop could be somewhat the same.
Like with the DOW, the NASDAQ has also reached levels on the chart that needed to be tested and Friday's drop to 2217 could end up being considered a successful re-test of the lows.
On a weekly closing basis, support is very strong at 2212 and then again at 2239. On an intra-week basis, support is strong at 2203 and then major at 2155/2167. On a daily closing basis, support is strong at 2261, decent at 2213 and very strong between 2169 and 2177. On a weekly closing basis, resistance is decent at 2343 and then again at 2371 and very strong at 2413. On a daily closing basis, resistance is decent at 2329 and major at 2413. On an intra-day basis, there is some minor resistance at 2296.
The chart is showing a Head & Shoulders type formation that if the neckline down at 2167 gets broken would project a move down to 1870. Nonetheless, the formation can also be seen as a base-building formation and with Friday's drop down to 2217, it could be interpreted as a successful re-test of the left shoulder at 2203 and of the major support down at 2155-2167. Keep in mind that the weekly chart had not seen a re-test of the lows since the 2167 low was made and the chart begged for one to happen. Nonetheless, the drop in price this past week was so strong that is might also be seen as a re-start of the bear trend, especially if the index is able to break Friday's lows as well as take out the left shoulder support at 2203.
The close on Friday at 2256 was only 1 point below the previous day's close and only 5 points below an important support level at 2261/2264. If the index can manage to close in the green and above 2261/2264 on Monday, the chart will show that as a successful retest of that important support level and that would be a strongly positive sign. It is evident that the 2264 high on Friday is a major pivot point and will act as resistance. Nonetheless, if the NASDAQ is able to trade above that level intra-day, selling pressure will be greatly relieved. There is no resistance above 2264 until 2296 is reached and even then that resistance is minor in nature. Any rally above 2264 could generate a strong rally and if that were to happen, it would be a strong signal the downside is over.
Like with the DOW, the chart of the NASDAQ is at a major pivot point that will either signal that the bear market has resumed or that major lows have been set and re-tested successfully. It seems evident that this week a strong clue as to what will happen will be given.
The NASDAQ did not close in the green on Friday and did not show the kind of recovery the other indexes showed. It is possible this coming week, while the DOW goes down to test the 11131 level, that the NASDAQ will break below this past week's low. A drop down to 2203 certainly seems like a good possibility under that scenario. Nonetheless, like with the other indexes, there is reason to believe that it too, could be bottoming out.
Possible trading range for the week is 2203 to 2329. Possible close for the week could be 2315.
S&Poors 500 Friday close at 1242
The SPX took a strong dive this week after it broke below the 1260 level that had been such a strong support during the last couple of weeks. Like with the DOW the index had a classic reversal week with higher highs, lower lows, and a close below the previous week's low. Such a reversal is generally a sign that further downside is expected. Nonetheless, the index managed to close out the week, above the very important previous weekly close at 1236 and by trading below that number but closing above it on Friday, gave signs as well, that a possible successful re-test of the previous lows was generated.
Like with the other indexes, the SPX is facing a week of decision as the break of support at 1260 as well as the classic reversal week has put the index under strong selling pressure.
On a weekly closing basis, support is major at 1236. Below that there is little weekly support until the 1180 level is reached. On a daily closing basis, support is decent at 1234 and very strong at 1215. On a weekly closing basis, resistance is major at 1298. On a daily closing basis, resistance will now be very strong at 1260 and again at 1274. Major resistance at 1301-1305. On an intra-day basis there is no resistance until 1277 is reached.
It is evident that when the SPX broke below the 1260 support level the bulls gave up the ship and the index fell with abandon. Nonetheless, the index was able to stop the downslide on Friday and manage a close above the major weekly closing support at 1236. Such a last minute respite could be indicative of an index that is being aggressively defended by the bulls and one that may not generate any follow through this week, as would normally be expected.
It is evident that this past week's low of 1217, as well as Friday's high of 1245, are keys to what the index will likely end up doing this coming week. Drops below 1217 will erase the positive action seen on Friday and weaken the chart substantially. Rallies above Friday's high of 1245 would give credence to the idea that the move down was a successful re-test of the lows. It is likely that Monday will give us a strong clue which one is the correct one.
Possible trading range for the week is 1225 to 1277. Possible close next Friday is 1270.
The indexes are facing a very critical week, which will determine much of what they will do for the month as well as for the rest of the year. It is important to note that September is normally a very bad month for the indexes. Nonetheless, so far this month the DOW has already established a 750 point range from high to low. In looking back on the last 11 years, the average between the high and the low for the month has been 836 points, and that includes two years (2002, 2003) in a bear trend where the drops exceeded 2000 points. During those years the market was suffering a recession and therefore the question that needs to be answered is whether we are in a recession now or starting to get out of one.
If we are still in a recession, lower prices will come and the action on Friday was simply a small respite before the strong selling re-appears. If the recession is starting to wane, expect the DOW to trade sideways during September (no new recent highs or lows) and for the market to start generating an up-trend thereafter. It is an impossible question to answer as of this writing, but it is a question that will likely be answered fully before the end of this coming week.
Keep an open mind and a watchful eye this coming week for clues as to what the indexes and traders are saying. Flow with the action and don't go into the week with a pre-conceived idea. Nothing is clearly defined………….yet.
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Stock Analysis/Evaluation
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CHART Outlooks
The indexes seem to be showing a slight inclination for upward movement but the probabilities of it are no better than 55-45. Mentions this week will all be purchases but in stocks with very clearly defined support levels that offer small risk factors. Nonetheless, the probability rating on each mention will be low due to the uncertainty of what the indexes will decide to do.
NUAN (Friday Close at 14.63)
NUAN is a company that produces voice recognition software and is considered by most to be the "elite company" in that industry. A few months ago, after a strong weekly rally that started at 6.87 in August 2006, NUAN reached a strong level of resistance up at the $23 that was first instituted when the stock started trading back in 1996. From that level the stock corrected back down to 12.45. The stock then rallied back up to 21.47 and a successful re-test of the highs and then proceeded a few weeks ago to re-test successfully the low with a drop down to 13.74.
This past week the stock seems to have re-tested the previous low at 13.74 (successful re-test of the 12.45 low) with an intra-day drop to 13.83. If the indexes decide they have found their own bottom, it is likely that NUAN, after two successful re-tests of the lows, will begin to stage a strong rally as well.
Intra-week support is strong at 13.74 and then again at 12.45. On a weekly closing basis, support is strong at 14.63 and minor at 13.97. On a daily closing basis, support is very strong between 14.53 and 14.74. On a weekly closing basis, resistance is strong at 16.44 from a previous high weekly close, 2 previous weekly low closes, as well as from the 100-week MA currently at that price. On a daily closing basis, there is minor resistance at 15.17, stronger between 15.99 and 16.22, a very strong between 16.35 and 16.53. Major resistance is found up between 17.62 and 17.89 from two major previous high closes as well as from the 100 and 200 day MA's.
If the indexes have indeed bottomed out, it is likely that NUAN will stage a small rally back up to the 16.00 to 16.40 level and trade for the month of September between $15 and $16, while building a strong support base from which to generate a new up-trend. This is an elite company with good fundamentals offering a product that has increasing demand. If the indexes have indeed bottomed out, the chart of NUAN will show two successful re-tests of the lows and will be primed to stage a new rally over the next 6-12 months to make new all-time highs. Purchase of this stock could be a buy and hold type of investment.
Purchases of NUAN between 14.20 and 14.34 and using a stop loss at 13.68 and having an immediate objective of a rally up to 16.40 will offer a risk/reward ratio of almost 4-1.
My rating on the trade is a 6.5 (on a scale of 1-10 with the strongest probability rating being 10).
MOT (Friday close at 9.06)
MOT is a stock that has been put through the ringer over the past 10 months. The stock has suffered a drop from a high of 19.68 in October 2007 to a low of 6.77 2 months ago. The company did go through a major management change a few months ago and recently has shown signs that the change may be generating some hope for recovery of what was a strong company in the past.
Over the past 2 months, MOT has generated what seems to be a "V" shaped bottom on the weekly chart. V-shaped bottoms can be powerful indicators of a stock that has changed direction and are normally seen when there has been some fundamental change of consequence. In addition to the V-Shape, the stock also shows an island formation with a gap on the way down between 7.83 and 7.63 and a gap on the way up from 7.71 to 8.01. Island formations are rare but when found are also powerful indicators that a stock has had changed direction.
The company in July 28th (time the second gap of the island formation was seen) announced a re-organization of the company whereas the company was split into 3 different divisions and it was stated that the division that was causing economic problems would be sold. Such an announcement generated an aggressive rally, which took the stock from 7.71 to 10.50 in a matter of 2 weeks.
On a weekly closing basis, support is very strong between 9.04 and 9.21. On a daily closing basis support is equally strong between 8.90 and 9.17. On a weekly closing basis, resistance is decent at 10.07 and again at 10.33 (10.50 intra-day). Above that level there is nothing of consequence until 12.70. On a daily closing basis, resistance is decent at 9.99 and quite strong between 10.26 and 10.33. Above that level the 200-day MA is at 10.82 and then nothing until 12.70.
On Friday, MOT dropped below a strong intra-day support level at 8.85 with an intra-day move down to 8.69. Nonetheless, the stock was able to generate a close at the weekly support level of 9.05, above the daily close support level at 8.90, and at the 20-week MA the stock broke above on the breakout. Based on the gap formation it seems likely MOT has not only found a bottom but has built a chart formation that is conducive to the stock starting a small up-trend. The profit potential seems to be limited at this time but then again the risk factors are limited as well, and offer at least a 4-1 risk/reward ratio. The potential for a good long-term buy and hold position also exists.
Purchases of MOT at Friday's closing price of 9.06 and placing a stop loss at 8.59 (10 ticks below Friday's low) and having an objective of 12.70 offers a risk/reward ratio of over 7-1.
My rating on the trade is a 6.5 (on a scale of 1-10 with the strongest probability rating being 10).
IGT (Friday close at 20.25)
IGT is a stock that has collapsed this year from a high of 49.41 in February to last Thursday's low of 20.05. In addition, the stock has been making new lows consistently, and in looking at the chart for the last 5 years, shows no support in sight. Nonetheless, there are a couple of reasons for thinking the stock may be in the process of bottoming out and generating a strong short-covering rally. To begin with, the $20 area is a strong psychological support and going back to 2003, you will find decent previous support at this price as well.
From a fundamental side, there are 18 analysts covering this stock and the median estimate for the value of the stock is $28 and low estimate is $20. In polling the analysts there are 3 of them saying it is a strong buy, 4 of them stating the stock is a buy, and 11 of them have it as a hold. No analyst has the stock as a sell. In addition, the company just last week installed a new and exciting video console (first of its kind) in Grand Casinos in Minnesota. The new video console is innovative and highly rated, giving 3-D performance without the use of special glasses. This video console is expected to generate strong revenues to the company in the future. To finish it off, just a couple of weeks ago IGT increased the dividend payout 3.6%, a company in trouble does not do that.
On the weekly intra-day chart, you do have to go back to 2003 to find support but in doing so, there is strong support around $18 and decent support at 19.56. On a weekly closing basis, support is considered strong at 19.80/19.86. On a weekly closing basis as well, resistance is very strong up at 23.99-24.20 but non-existent between Friday's' closing price and that level. On a daily closing basis, there is decent resistance at 22.22 (previous high and 20-day MA), again decent at 22.83 (previous high and 50-day MA), and strong at 24.21 (previous daily high close of some consequence). Further resistance of some consequence is seen between 25.72 and 25.90 from a high close and several previous intra-day highs. There is a gap between 27.18 and 26.18 that will also act as strong resistance but if closed, there is no resistance until the $35 level is reached.
The stock has dropped, over a period of 6 months, almost 60% in value and is severely oversold. IGT has reached levels of support where some buying interest is likely to appear and the company has successfully launched a product that is innovative and likely to be in demand. In addition, one of the criticisms that has been mentioned about the company is bad management. Over the past couple of weeks several of the principals of the company have been let go. It is evident that with the possibility of the indexes having found a bottom, a very oversold condition, and a clearly defined support level with good risk/reward ratios, that this is a stock that is worth taking a flyer on.
Purchases of IGT between Friday's closing price of 20.25 and down to 19.86 and placing a stop loss at 19.46 and having a minimum objective of 24.00 will offer a risk/reward ratio of almost 5-1.
My rating on the trade is a 7 (on a scale of 1-10 with the strongest probability rating being 10).
AA (Friday closing price 28.30)
AA is a stock that over the past 10 years has been generally trading over a wide trading range between a low of 17.62 and a high of 47.60. Nonetheless, 80% of the time, the stock has traded between 26.50 and 39.00 and this past week the stock got back down to the lows of that trading range. If the indexes have found a bottom, it is likely that AA could stage a strong rally from these levels.
It is important to note that just 15 weeks ago, AA was trading up at 44.77 and just 39 weeks ago the stock was trading down at 26.69. Such a consistent and wide trading range offers trading value of great consequence and profitability, if chosen correctly.
Intra-day support is very strong between 26.02 and 27.36. Over the past 10 years there have been 6 major intra-week lows in that range. On a weekly closing basis, there is major support between 26.42 and 26.60, decent between 27.50 and 27.62, strong again at 28.30. On a daily closing basis and going back 5 years, there is strong support between 28.20 and 28.73 and then again major between 26.60 and 27.40. Resistance, on the weekly closing charts, is minor up at 31.11 to 31.80, minor again at 32.34 (with a previous small high but the 200-day MA as well), and very strong at 35.39. At that level is a major previous high is found as well as where the 100, 50, and 20 day MA's are currently located and converging. On a daily closing basis, the resistance is quite strong between 32.17 and 32.90 as there have been 5 recent daily closing highs as well as two previous closing lows in that range, as well as the 50-day MA.
AA is a stock that will probably move in conjunction with the indexes and if the indexes have bottomed out, it is probable the stock will rally from this level because of the long-standing support that is found here. In addition, the risk/reward ratios as well as the excellent probability factors that the chart offers make this trade attractive.
AA did close below the most recent important daily close at 28.62 and could see a bit of intra-day weakness on Monday. Nonetheless, if that happens, it is likely to be a buying opportunity.
Purchases of AA between 27.70 and 28.10 and placing a stop; loss at 26.59 and having an immediate objective of 32.40 offers a risk/reward ratio of almost 4-1. The primary objective, though, will be 35.39 and the risk/reward ratio will jump up 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).
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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 reached the downside objective at 13.91 that the break of the neckline of the Head & Shoulders formation generated. Upon reaching the objective the stock turned around and rallied enough to close at the same weekly low close at 14.63 that was seen in July. That weekly close has been the low close for the last 18 months and is evidently a major pivot point at this time. The stock is now waiting to see what direction the indexes take. A daily close above 15.17 will likely be positive and put the stock into a trading range between 14.97 and 16.35 for the next 3 weeks. A daily close below 14.46 will likely generate further downside action with possible drops down to the 12.85 low seen in January or even down to the 200-week MA at 11.40. STP had an impressively volatile day on Friday with a strong intra-day drop below the major support at 41.60 as well as below the psychological support at $40, and then a rally to close above a positive weekly support level at 42.97. In addition, the stock was able to maintain a close above the 200-week and 20-week MA. The action has to be explained as "very positive" and could generate a break above the 50-week MA and major resistance level up at $49 this coming week. It is evident, though, that all of this will depend on what the indexes decide to do as it would be very difficult for the stock to rally if the indexes are breaking down sharply. Nonetheless, if the indexes have established a successful re-test of the lows, I would not be surprised if the stock has a major breakout this coming week. Keep a close eye on the levels I mentioned on the indexes as clues to what the stock will do. YGE had the same kind of a day on Friday that the indexes had, as the stock came close to breakdown levels before being able to generate a rally and close at a positive level. The weekly close above 15.29 must be considered a strong positive but like with the rest of the market, the action of the indexes this week will determine the stock's immediate future. A break below Friday's low of 14.31 will be quite negative while a rally and close above 16.00 will be quite positive. VLO is a stock that has been "waiting" for the last 6 weeks for something to happen. With this coming week likely to be a decisive week, it is important to note the breakout and breakdown points for the stock. Any daily close above 35.72 or below 32.63 will likely signal strong follow-through in that direction. Like with so many other stocks, the decision will likely be made by what the indexes decide to do. JBL has broken down in an impressive way but reached levels this past week that could generate a short-covering rally. On a weekly closing basis the 13.13 level is a very decent support level that should hold at this time. In addition, the stock had a breakaway gap between 12.85 and 13.15 that was partially filled on Friday with a drop down to 12.95. Nonetheless, the gap was not closed and that likely means that the fundamentals that generated that gap are still likely in place. It is likely the stock will generate a rally up to the 15.13 level as the $15 is considered an important pivot point as well as where the 50-week MA is located. Rallies up to that level are likely this week, if the indexes do not break down. PBCT has traded for the last 13 months between 18.62 and 13.92. The high side of that range has now been tested on 8 different occasions without having been broken. On Friday the stock got up to 18.55 as well as the 100-week MA. Until 18.62 is taken out, the stock continues to be a sale. ELON has built a very evident flag formation on the weekly charts with the flagpole being from 10.03 up to 13.80 and the flag from 13.80 down to 12.00. A break above the top of the flag at 13.46 would project a move up to the 17.90 level. Support is now decent at 12.00 and very strong at 11.66. Resistance is strong at 13.46. Like with other stocks, it is likely ELON will react to whatever the indexes decide to do. Nonetheless, if the indexes do not break down, it is likely that the stock will break out and generate a strong rally.
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1) JBL - Averaged long at 17.09 (2 mentions). No stop loss at present. Stock closed on Friday at 13.31.
2) VLO - Purchased at 33.53. Averaged long at 32.30 (4 mentions). Stop loss now at 31.93. Stock closed on Friday at 33.38.
3) BA - Covered short at 62.69. Shorted at 65.64. Profit on the trade of $295 per 100 shares minus commissions.
4) JBL - Liquidated at 16.15. Averaged long at 17.09. Loss on the trade of $188 per 100 shares (2 mentions) plus commissions.
5) CAT - Covered short at 64.08. Shorted at 71.30. Profit on the trade of $722 per 100 shares minus commissions.
6) STP - Purchased at 42.25 and again at 41.60. Averaged long at 42.91 (3 mentions). No stop loss at present. Stock closed on Friday at 43.27.
7) PBCT - Shorted at 18.25. Stop loss at 18.72. Stock closed on Friday at 18.43.
8) MMC - Shorted at 32.40. Covered short at 32.17. Profit on the trade of $23 per 100 shares minus commissions.
9) AMTD - Shorted at 21.00. Covered short at 21.30. Loss on the trade of $30 per 100 shares plus commissions.
10) YGE - Averaged long at 19.156 (3 mentions). No stop loss at present. Stock closed on Friday at 15.31.
11) K - Covered short at 54.69. Shorted at 54.24. Loss on the trade of $45 per 100 shares plus commissions.
12) ELON - Purchased at 12.37. No stop loss at present. Stock closed on Friday at 12.88.
13) AXP - Covered short at 38.48. Shorted at 38.79. Profit on the trade of $31 per 100 shares minus commissions.
14) KGC - Liquidated at 14.17. Purchased at 15.63. Loss on the trade of $146 per 100 shares plus commissions.
15) HRB - Liquidated at 26.50 and at 23.83. Averaged short at 25.175. Profit on the trade of $2 per 100 shares (2 mentions) minus commissions.
16) RIO - Purchased at 24.87. Averaged long at 25.68. Liquidated at 23.80. Loss on the trade of $564 per 100 shares (3 mentions) plus commissions.
17) NUAN - Covered short at 14.01. Shorted at 15.98. Profit on the trade of $197 per 100 shares minus commissions.
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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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