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Issue #89 
September 14, 2008 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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| Amid Financial Uncertainty, DOW Successfully Re-tests Lows!
DOW Friday close at 11421
After a wild and mainly unpredictable trading week the DOW closed out the week 200 points higher. In so doing, it showed that last week's close at 11221 was a successful re-test of the previous weekly closing low at 11101. Considering that several important financial companies such as LEH, WM, and AIG were down strongly and on the brink of bankruptcy, it must be said that the bottom seen 8 weeks ago is not likely to get broken anymore. After this week's negative news, it is difficult to visualize any further news that could cause the index to resume the downtrend.
The DOW was able to survive and even rally as LEH dropped from 17.73 to 3.17 in one week. Such a drop in price in a stock that forms an integral part of the financial community should have caused the index to go below last week's low and at the very minimum test the 10828 low. Nonetheless, the DOW was able to keep itself above last week's low, test the support levels successfully, and close on a positive note. When the most negative news possible can no longer generate aggressive new selling, it is likely time to go the opposite way.
On a weekly closing basis, strong support is now found at 11221 and again at 11101. On a daily closing basis, support will now be strong at 11231. Below that level you also have support at 11188, 11131, and major at 10978. Intra-day support is now major between 11099 and 11125. On a weekly closing basis, resistance is decent at 11497 and major at 11734. On a daily closing basis, resistance is decent at 11511, strong between 11638 and 11656, and major at 11782. On an intra-day basis, resistance is decent at 11578 and quite strong up between 11698 and 11715.
The DOW, due to the uncertainty still surrounding the financial community, was not able to give a buy signal on Friday with a close above 11511. Nonetheless, the index has set itself up that as soon as there is some resolution to LEH the index can begin a more orderly and less volatile up-trend. The month of September is still not likely to be a month in which the indexes are likely to break above August highs, but trading within the 750 point trading range already established for the month, between 11790 and 11038, is likely.
It is now probable that the lows will no longer be tested again. During the last couple of weeks the lows have been successfully tested several times already. This likely means that for the rest of the month, the DOW should have a slight upward bias with rallies up to and above 11700 becoming possible.
Next week's trading range is still a bit up in the air, as on Monday there should be some determination to the status of LEH and how that gets resolved will impact how the DOW trades the first part of the week.
Nonetheless, if the resolution is positive, or at least not to the point of bankruptcy and closure of LEH, the DOW should see a range between 11417 and 11715. Likely trading range for the next couple of weeks is 12222 and 11790.
NASDAQ Friday Close at 2261
The NASDAQ continued to be the weak sister as it did make lower lows than the previous week. Nonetheless, when it was all said and done, the index was able to close higher than last week's close at 2256 and establish the close, though only by 5 points, as a second successful retest of the two previous weekly closes at 2212 and 2239. The chart, as far as generating the necessary downside base building and re-testing, has now been totally fulfilled, and is ready to begin an up-trend.
Like the DOW, the NASDAQ failed to give a buy signal by continuing to close below the 200-week MA currently located at 2315. This does leave the door open for further weakness, should there be a financial collapse occurring this week precipitated by LEH. Short of that, it is likely the index will be testing the 200-week MA this coming week and likely getting above it.
On a weekly closing basis, support is now strong at 2256, and then again at 2239 and 2212. On a daily closing basis, support should now be very strong down at 2210/2213 where a double bottom has been built. Major support is down at 2169. On an intra-day basis, though, drops down to 2200-2210 are still possible. On a weekly closing basis, resistance is not found until 2371, other than the 200-week MA at 2315. That resistance is considered minor to perhaps decent. Decent resistance is found again at 2413 and major at 2453. On a daily closing basis, there is very minor resistance at 2270 and then nothing until 2330 where the resistance becomes decent. Above that level there is nothing of consequence until 2354 to 2370 is reached. Major resistance is found up at 2412. On an intra-day basis, there is some minor resistance up at 2305.
Though there is still a possibility of one more intra-day move down to the 2210 level, the reality is that the chart is now set up for strong up moves. Between 2300 and 2400 there is no "recent" resistance as the last time the index fell, it fell down in one fell swoop. Should the index be able to get above 2300, it is likely that 2400 will be seen soon thereafter.
It is likely that for the first few days of the coming week, or at least until the results are in for LEH, the NASDAQ will likely trade between 2210 and 2300. Nonetheless, if that "white elephant" gets taken of the index shoulders in a positive way, there could be a sharp move up in the NASDAQ, more so than with any other index.
Probable trading range for the NASDAQ this coming week is 2210-2315.
S&Poors 500 Friday close at 1251
Of all three indexes, the SPX was under the most pressure this past week as several financial stocks such as LEH took the index down. The SPX did break below decent daily close support at 1234, with a daily close at 1225, but on Friday the index was able to reverse that small break and close above the previous support, above last week's close, and above the major weekly close support at 1236. All in all, the index had a decent week when faced with a small financial industry crisis.
In addition, with the previous week's close at 1242 and the low close for the last two years being 1239, it now looks like a double bottom has been built. If that double bottom is confirmed with another higher close next week, it will not only suggest a strong move up from these levels but a support formation that will likely to last for a long time.
Weekly close support is major between 1236 and 1242. On a daily closing basis, support will now be very strong at 1225 (1212 intra-day) and again at 1215 (1200 intra-day). On a weekly closing basis, resistance is decent at 1261 and very strong at 1292. On a daily closing basis, resistance is decent to strong at 1268 with a previous important daily close as well as the 20 and 50 day MA's. Resistance is again strong at 1284 and major between 1300 and 1305.
It is evident that the SPX will continue to be the weak sister while the financial industry is still under strong selling pressure. Nonetheless, having survived a very difficult week without breaking down has increased the probabilities of a consistent recovery. It is possible that with the dramatic drops in price on LEH, WM, and AIG, seen this past week, that most of the negative news in that industry is now out.
The 1268 level, on an intra-day and daily closing basis, is likely to be a major pivot point for the index. If the SPX is able to close above 1268, the likelihood of the index advancing up to 1300 one more time increases dramatically.
Likely trading range for the week is 1225 to 1292.
It is evident that this past week was crucial to the indexes as the Fed's decision to support Freddie Mac and Fannie Mae gave traders a huge sigh of relief. Nonetheless, one day after that news came out, the indexes once again got hit with the possibility of two big financial institutions on the brink of bankruptcy and a third in AIG, and perhaps a 4th in Merrill Lynch, being considered at risk. So much news over a short period of time has been difficult to digest by the investment community.
Over the past few weeks there have already been major amounts of liquidation of accounts among Hedge and Mutual funds as well as withdrawal of funds from banking institutions. The participation in the marketplace among the investment community has consistently been dropping and this past week much of that came to the surface in a forceful way. With September showing a history of being the worst month of the year for the marketplace, the ability of the indexes to survive such onslaught of negative information seems to state that the worst may be over.
Under such a continued negative scenario it is not expected that the indexes will thrive. Nonetheless, in a marketplace that has already dropped so much in value over the past 9 months, it is possible that a strong short-covering rally, as well as bargain-basement-buying will begin to occur over the next couple of weeks.
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Stock Analysis/Evaluation
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CHART Outlooks
I do believe the worst is over for the indexes and though there are still questions that will need to be answered this week such as LEH, WM, and AIG, as soon as those questions are answered it is likely the indexes will rally. I do not expect any major rallies in the indexes, but I do expect an upward bias. It is likely that with most stocks, the lows were either made this past week or will be made this week.
WDC (Friday Close at 24.07)
WDC has been in a major weekly downtrend since June 2 when it reached a high of 40.00. On Thursday, the stock reached a low of 23.30 and an area where there are several strong support levels. In addition, the stock closed on Friday at a level that represents a major previous high weekly close that stood up for over a year, above the strongest weekly support in the last 52 weeks at 23.61, as well as where the 100-week MA is currently located.
It is also important to note that WDC has been in a strong weekly up-trend since 2001 and though there have been 2 strong corrections during the last 7 years, no correction was successful in breaking a major previous weekly closing low. With 23.61 having the tag of a major previous weekly closing low, it can be said that only if the long-term trend has changed, it is unlikely the stock will go lower.
On a weekly closing basis, support is major at 23.61. Support is considered strong at 24.07-24.18 from the 100-week MA as well as from a previous weekly closing high of great importance at 24.18. On a daily closing basis, support is equally strong at 23.61 from a double bottom at that price. On an intra-day basis, there is strong support at 23.43 and major at 21.91. On a weekly closing basis, resistance is minor at 26.69 from a previous weekly closing low, decent at 28.91 from a previous weekly closing high, and very strong up at 29.46 from a previous closing high as well as from the 50-week MA. On a daily closing basis, resistance is minor at 25.41, decent at 26.85 from two previous daily low closes as well as from the 20-day MA, and strong up at 29.46 from several previous high closes at that level as well as from the 50-day MA. On an intra-day basis, there is no recent resistance until 26.93 is reached.
It seems highly likely that WDC has reached a level of support of great consequence and if the indexes begin to move up from these levels, the stock will likely experience at least a short-covering rally. It is important to note that on July 24 the stock had a negative earnings report and gapped down from 35.31 down to 33.41. That gap area has not yet been tested, not even once. Should a short-covering rally start, it is possible that a re-test of that level will be seen.
Even so, there is very little resistance of consequence until the 29.46 level is reached and with the stock sitting at a major support and with clearly defined limitation of risk at these levels, the risk/reward ratio is very attractive.
Purchases of WDC at Friday's closing price of 24.07 and up to 24.18 and using a stop loss down at 23.20 and having an objective of a rally at least up to 29.40 will offer a risk/reward ratio of over 6-1.
My rating on the trade is a 7.5 (on a scale of 1-10 with the strongest probability rating being 10).
RX (Friday close at 21.14)
RX is a stock that is relatively conservative and one that has established a clearly defined trading range for the last 11 months between $25 and $21. In addition, this is a stock that seems to track the DOW very well and if the indexes are to stage a rally, it is likely that RX will be doing the same.
RX has also built a very strong bottom formation over the past few months with a double bottom shown on the weekly closing chart at the 20.74-20.83 level. In addition, since 1998 RX has shown a propensity to use the $21 area as a major weekly pivot point. During the last 10 years there have only been two years (2000, and 2002) where the stock traded below the $21 level and in 2002 that low price corresponded to the DOW trading down at 7500.
On a weekly closing basis, support is very strong down at the 20.74/20.83 level. Since 1998, the stock shows 5 major weekly closing lows between 20.74 and 21.48. On a daily closing basis, support is major between 20.74 and 21.17 with 9 daily low closes in that range. On an intra-day basis, the stock did go down to the 20.02 level back in January, but since then has maintained itself above 20.60. On a weekly closing basis, resistance there is very minor resistance at 21.84 and strong resistance at 22.82. Above that level there is nothing until the $25 level is reached. On a daily closing basis, resistance is strong at 22.00 and strong again at 22.82 with a previous daily high close as well as the 100 and 200 day MA's. Above that level, resistance is decent at 23.31 and then nothing until strong resistance is seen between 24.75 and 25.13.
On Friday, the stock closed in the green as showed the previous day's close at 21.05 as a successful re-test of the most recent low at 20.74. It seems highly likely that this week the stock could generate another re-test of the resistance up at 22.00. If the indexes have in fact confirmed a bottom is in place, RX should have no problem mirroring the action.
It is likely that during the next couple of weeks RX will have some problems getting above the resistance up at 22.82. Nonetheless, if my evaluation of the indexes showing rally strength in October is correct, it is highly likely that the stock will attempt to reach the $25 level during that time. I do believe that if the stock rallies this week, that the longer-term possibilities of breaking above $25 do exist and if that happens, rallies up to the mid $27's would happen.
Purchases of RX at Friday's closing price of 21.14 and down to 21.17 and using a stop loss at 20.64 and having an objective of a move up to 24.75 offers a risk/reward ratio of at least 4-1. Even if only a move up to the 22.82 level were to occur, the risk/reward ratio would be at least 2-1 but with a high probability rating.
My rating on the trade is an 8 (on a scale of 1-10 with the strongest probability rating being 10).
IGT (Friday close at 19.51)
IGT is a stock that has collapsed this year from a high of 49.41 in February to last Friday's low 19.46. In addition, the stock has been making new lows consistently, and in looking at the chart for the last 4 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 (5 years ago), you will find decent support between 17.84 and 18.47 and then also some support at 19.56.
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. In addition, the company just two weeks ago installed a new and exciting video console in Grand Casinos in Minnesota that is innovative and highly rated, giving 3-D performance without the use of special glasses. To finish it off, just a couple of weeks ago IGT increased the dividend payout 3.6%, meaning the company is expecting to do well.
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 and just 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 at 19.00 or better and placing a stop loss at 17.74 and having a minimum objective of 24.00 will offer a risk/reward ratio of almost 4-1. It is possible that IGT may find a bottom this week, based on where the indexes trade. Stepping up to buy the stock as high as Friday's close at 19.51 is an option to consider if the indexes are holding up well.
My rating on the trade is a 7 (on a scale of 1-10 with the strongest probability rating being 10).
FCEL (Friday closing price 6.37)
FCEL is a great chart trading stock that has been in a slight weekly downtrend for the past 5 years. Nonetheless, over the past 9 months the stock has built a strong support level, which seems to suggest the stock is ready to generate a rally over the next month or two at least. In addition, if the stock market has in effect found a bottom, the possibilities of FCEL breaking out of the 5-year downtrend have increased.
It is also interesting to note that the weekly chart action of FCEL between Aug04 and Nov05 seems to be identical to the chart action seen recently starting in January of this year. Back in Nov05, after the previous low had been tested successfully, the stock generated a strong rally from 7.90 up to 15.00 over a period of 4 months. With the chart action looking almost identical, it can be said that a rally up to the $12 over the next few months is strongly possible as well.
On a weekly closing basis, support is very major at 6.00 due to a double bottom at that price. That double bottom was built over a period of 9 months and signals the lowest closing price in 5 years. Support is also strong at the 6.10-6.19 level as that has now been seen twice as successful re-test of both of the double bottoms. On an intra-week basis, support is found down at 5.43 and very strong at 5.71-5.84. On a weekly closing basis, resistance is decent at 7.12 from a previous low and a previous high daily close. Resistance is a bit stronger at 7.86 and quite strong at 8.36, from two important daily high closes, two important daily low closes, as well as from the 50 and 100 day MA's.
It is important to note that over the past 3 weeks the stock has fallen straight down from 8.83 to this past week's low of 5.71. Nonetheless, the weekly close this past week was higher than last week and that seems to signal that the downside is over.
It is also important to mention again that back in 2005, a formation quite like the one currently in place, helped generate a $6.10 rally from the low of the successful re-test of the low. It seems probable the close two weeks ago was a successful re-test of the previous low and with a double bottom in place, a rally of $6 (up to the $12) could be seen over the next few months.
Purchases of FCEL between 6.10 and 6.20 and placing a stop loss at 5.61 and having a minimum objective of a rally up to the 8.55 level will offer a risk/reward ratio of 4-1.
My rating on the trade is an 8 (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 successfully tested last week's low this past week when it was able to stay above the 13.83 level seen the previous week. In addition, the stock closed above last week's close at 14.64, thus giving a signal that it had successfully tested the 18-month weekly closing low. The stock continues to trade around the $15 level that has been a major pivot point for this period of time. If the indexes are able to shake off the negative financial news in the market, it is likely that NUAN will now attempt a rally to establish itself above the $15 level and begin a new up-trend. On Friday the stock did give a failure-to-follow-through signal to the 18-month daily low close at 14.24, when the stock reversed and closed above the most recent daily high close at 14.68. A daily close above 15.14 will now be considered a buy signal as well as confirmation the downside is over. A close below 14.24 would be considered quite bearish. STP had a positive but not impressive close on Friday when the stock was able to close above the $40 support level but not above the 200-week MA at 42.03. During the week the stock saw strong selling coming in, mainly because the largest solar company in the industry (FSLR) suffered strong selling. During the drop the stock did close an open gap at 37.50. Such a gap close can be considered a small negative as the gap was caused by fundamental information. Closure of the gap has taken away some of the recent strength shown in the stock. It is now likely the 42.03 level will be strong resistance. A daily and weekly close above 43.27 is now needed to regenerate the upside. With the recent drops in price, it is now looking more probable the stock will trade sideways between 37.50 and 43.00 for the next few weeks. "Trading" the stock within this range seems to be the way to go. At this moment there is more potential for a drop down to the $35 than a rally up to the $45 level. YGE broke down this week in a way that suggests the stock will not be generating any "strong" moves up during the next few weeks, unless new fundamentals information is released. The close on Friday below the 14.10 level was a break of weekly support of consequence, which will likely keep the stock under pressure unless the close can be reversed next week. Nonetheless, the daily close above the 13.19 level suggests that the stock is not heading much lower and will likely be trading in a sideways trading range for the next few weeks. Rallies up to the 15.70 level are possible but drops down to 11.44 level are also possible, under the current chart scenario. A daily close above 15.70 is needed to re-generate any upside moves. A close below 13.19 will likely cause a break down to the 11.44 level. The 14.00 level will likely act as a pivot point this coming week. A close above 14.00 will likely generate further upside during the week while a failure to close above 14.00 will bring selling pressure back. JBL broke down further this past week but gave minor indications during the week that perhaps it has found a temporary level of support from which to generate a short-covering rally. Between 12.00 and 12.50 there is some previous support shown and with the daily close on Thursday at 12.43 and subsequent higher closes the rest of the week, it is possible the stock will be having a short covering rally up to the $15 level this coming week. The objective of the short-covering rally would be an intra-day high at 15.17 and a daily closing high at 14.95. A close below 12.43 will likely generate a drop down to the 12.12 level, on a daily closing basis, where there is decent support as well. Decent resistance will be seen at 13.96, on an intra-day basis. Probable trading range for the next 2-4 weeks is $12 to $15. ELON had a bullish breakout above the top of the weekly flag formation but was unable to close out the week with a breakout signal. The stock did trade up to the 100-week MA at 14.50. It is important to note that the 14.50 print was only done of the opening minute on Monday and the stock truly did not trade above 13.49 at any other time. This means the breakout was not real and therefore the failure to follow through is null and void. The stock does have strong support down at 12.00 and continues to have strong resistance up at 13.50. The stock closed on a positive note on Friday and should see further upside this week. A close above or below the two levels mentioned, should generate further movement. AA gave the first signal that the downtrend may be over when it closed above last week's close at 28.47. The stock has been in a strong downtrend for the last 3 months and for the last three weeks was acting like a falling knife. The stock did make new 34-month intra-day lows this week but by the end of the week was able to reverse the break and close on a positive note. In addition, on the daily closing chart, the stock never broke the previous strong support at 26.60 and with Friday's weekly close being a positive, it is likely that strong follow through to the upside will be seen this week, unless the indexes break down. Probable trading for the week is 27.99 to 31.64. DELL has dropped strongly for the last 3 weeks but has reached a level of strong support down in the high $18's that seems is likely to hold. On a weekly closing basis, support is major at 18.50 and decent between 19.03 and 19.35. On an intra-day basis, support is very evident and copious between 18.80 and 19.00. On an intra-week basis, resistance is minor at 20.75, decent up at 21.60, and then strong up at $25. Stock has been reacting to the indexes recently, so much of what it will do this week will depend on what they do. Drops down to the 18.50 level are possible if the indexes show any kind of weakness. Nonetheless, if the stock is able to get above 19.53 intra-day, it should rally up to the 21.80 level without too much of a problem. It is highly likely that the stock is near or has found the bottom to its recent downtrend and offers a good risk/reward ratio at these prices. SGR has been on a steep downtrend for the last 7 weeks from a high of 64.66 to a low of 35.00 seen this past week. Nonetheless, with that drop the stock reached the 200-week MA as well as a major previous high at 36.08 that stood for over a year. The stock had a wide range this week between a high of 43.44 and a low of 35.00, closing on Friday right at the middle of that trading range thus offering the probability of a spike bottom. Much of the rally on Friday was due to Hurricane Ike, as SGR is a construction company with strong ties to Texas and will likely be called upon to be the main reconstruction company in the aftermath. Nonetheless, the chart seems to say that the worst is over for this company and that further upside will be seen. On the weekly chart there is no resistance whatsoever until 45.75 but keep in mind that resistance is from a previous weekly low close. Previous low closes are not as strong as previous high closes. Above 45.75 there is no resistance on the weekly chart until the 100-week MA is reached, currently located at 48.40. On the daily chart the stock was able to close above Thursday's low close at 35.27 and give a signal that the downside is over. There is a very minor resistance at 41.37 and then basically nothing until the 20-day MA is reached up at 45.30. On an intra-day basis, some resistance will be seen at 42.50. It appears the stock has found a bottom and upside movement with an objective of $48 could be seen. A close below 35.27 would be quite bearish.
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1) JBL - Averaged long at 17.09 (2 mentions). No stop loss at present. Stock closed on Friday at 12.73.
2) VLO - Liquidated at 30.70. Averaged long at 32.30. Loss on the trade of $642 per 100 shares (4 mentions) plus commissions.
3) VLO - Purchased at 35.05. Covered at 36.00. Profit on the trade of $95 per 100 shares minus commissions.
4) SGR - Purchased at 36.20. Stop loss at 24.90. Stock closed on Friday at 39.12.
5) DELL - Purchased at 19.30. Stop loss at 18.70 (mental). Stock closed on Friday at 19.04.
6) STP - Purchased at 37.41. Averaged long at 41.07 (3 mentions). No stop loss at present. Stock closed on Friday at 41.10.
7) PBCT - Covered at 18.63. Shorted at 18.25. Loss on the trade of $38 per 100 shares minus commissions.
8) MOT - Purchased MOT at 9.14. Liquidated at 8.45. Loss on the trade of $69 per 100 shares minus commissions.
9) AA - Purchased at 27.80. Averaged long at 27.99. No stop loss at present. Stock closed on Friday at 28.67.
10) YGE - Averaged long at 19.156 (3 mentions). No stop loss at present. Stock closed on Friday at 13.67.
11) NUAN - Purchased at 14.52. Stop loss at 13.73. Stock closed on Friday at 14.85.
12) ELON - Purchased again at 12.37. Averaged long at 12.37 (2 mentions). No stop loss at present. Stock closed on Friday at 12.73.
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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