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Issue #95 
October 26, 2008 | Newsletter
The newsletter with chart analysis for stocks and stock indexes |
Stock Indexes Analysis/Evaluation
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| Lots of Selling Pressure, but no New Lows!
DOW Friday close at 8379
The DOW suffered through a strong week of selling after the index failed to follow through on last week's higher close. After a nice rally day on Monday, the index was unable to generate any new buying and began to drop consistently for the rest of the week. By Friday, the fear surrounding a possible collapse of the world's economies was so tangible that all indexes around the world opened up that day with losses of anywhere from 8-14%. The futures market went limit down for the first time since 1987 and trading was suspended until the market opened at 9:30 AM.
Due to the limit down trading on the futures market it was expected that further downside of consequence would be seen when the market opened. Nonetheless, after the initial selling flurry, the DOW did not fall any further and was able to generate some minor upward movement during most of the day. It is important to note that the bears were totally in control, as the buying was sporadic and very limited, nonetheless with the entire world markets collapsing, it was surprising that the indexes did not collapse as well. The recent intra-day lows at 7887 and 8198 were not broken, even though new daily and weekly closing lows were made.
On a weekly closing basis, there is decent support at 8236 (2001 weekly closing low for the year). Below that, there is some support at 8016, then 7740, and then major at 7548. On an intra-week basis, there is decent support at 8198, then strong at 7887 (recent low). Below that you would have to go back to 2002 where there is strong support at 7533/7563 and then major at 7198. On a weekly closing basis, resistance will now be strong up at 8873/8896 (9077/9043 intra-day). On a monthly closing basis (which will happen on Friday), the index shows strong support at 8480 as that is where the 200-month MA is currently located.
Late in the week it seemed that the DOW would be breaking aggressively and putting the 2002 lows to a test. Nonetheless, the inability of the bears to push the market down on Friday, when the rest of the world's markets were collapsing, seems to show that there is support of some consequence in the index at these lower levels. It also goes to show that the panic selling as well as margin-call liquidations that have been seen over the past few weeks are no longer in evidence.
With confidence in the market reaching all-time lows and the prospects for recovery far out in the future, it is difficult to imagine the market being able to generate any kind of strong rally any time soon. Nonetheless, it is also evident that further selling will be labored as many stocks may have reached levels of value where further downside is not to be expected.
Even though the DOW made new 6-year daily and weekly closing lows on Friday, the failure of the bears to deliver a "knock-out" blow when the market was on its back is indicative that, at this time, the downside is limited. It is likely that the market is getting ready to go into a sideways trend for the next few months while further news is waited for and evaluated. Such a scenario will help relieve the oversold condition in the market as well as generate a normal correction phase. A likely trading range between 8000 and 9000 seems to be the most likely scenario for the next couple of weeks. Volatility should begin to get back to more normal levels.
Monday's action will be important and indicative, as the rest of the world's markets will have had a chance to react to the late action in the indexes on Friday. Some two-way action is likely to be seen on Monday and Tuesday with possible drops down near or just below 8000 being possible. Nonetheless, if the DOW has not broken below the recent intra-day low of 7887 or closed below 8000, it seems likely that a short-covering will begin by Wednesday. In addition, with the monthly close due on Friday, it is likely that some window dressing will occur this month. The 200-month MA is currently at 8480 which also likely means that next Friday, if that level holds up, the break of weekly support 8451 will be negated.
NASDAQ Friday Close at 1552
The NASDAQ continues to be the weak sister of the indexes as emerging markets are taking the brunt of the selling. The index made new 6-year daily and weekly closing lows this past week and there is still room to the downside before a strong support level is reached. The NASDAQ will likely continue to outperform the indexes to the downside as the world's economic maladies will be affecting the smaller type companies much more so than the Blue Chip.
With no strong support near-by, it is likely the NASDAQ will remain under selling pressure this week, at least until support is reached.
On a weekly closing basis, support is very strong down at 1423 (1387 on an intra-week basis) as that was the lowest weekly close back in Sep01. Some very minor daily closing support at 1460 as well. Below 1387 there is some minor support t 1341 and then nothing until 1108. On a weekly closing basis, resistance is minor at 1777 from a previous weekly closing low as well as from last week's intra-week high.
The NASDAQ is presently the index under the most selling pressure and it is likely the index will be heading lower as no support is found near-by. The support down at 1387 (1423 on a weekly closing basis) is very strong and perhaps even major. It is unlikely the index will be breaking below that level on this go around. Nonetheless, getting down to that level now seems probable.
In addition, the NASDAQ now shows a breakaway gap at 1947 to 1905 and a runaway gap from 1695 to 1679, this likely means that the 1679 level will also now work as decent resistance as well.
At this time I see no action on the chart that would lead me to believe the NASDAQ will be generating a rally of consequence. Nonetheless, once the index has established a bottom, rallies up to the 1770 level are probable. With the index closing on Friday near the lower end of the mentioned trading range, it is likely that the downside level will be seen first. Nonetheless, it is likely that two-way action will be seen this week. With the monthly close coming on Friday, the index should see a rally late in the week.
S&Poors 500 Friday close at 887
The SPX, like the DOW, also closed in a new 6-year daily and weekly closing low. Nonetheless, the previous weekly low close at 940 as well as the previous daily low close at 898 were not levels of previous importance and therefore breaking those levels is not as indicative as it could be under different circumstances. It continues to be evident that the SPX is the index to watch as it is largely based on the financials, and those are the ones that caused and led the way down.
The SPX is now reaching levels where previous support of consequence are found and it is there where an evaluation can be made comparing this years economic problems with the ones found in the past.
On a weekly closing basis, decent support is found at 847 and then again at 829. Major support is found at 800. On an intra-week basis, major support is found between 764 and 788. On a weekly closing basis, resistance will now be strong between 928 and 940 and then again at 985. Major resistance will now be at 1003. On an intra-day basis strong resistance will be found and then again at 985.
The SPX continues to be the index to follow and now that major support levels are coming into view, even more so. The close on Friday at 877 opened the door for the index to drop down to the 800-840 level this coming week. Nonetheless, like with the DOW, the index is showing signs that selling will now become labored and that the bottom is either in place or close to be reached. Keep in mind that the intra-day low seen over a week ago was 839 and it is possible that the weekly closing low of consequence at 847 could be seen without a new low being made.
Either way, the SPX is the index to watch as it is the only one with levels of support and resistance of consequence nearby.
I can see some additional weakness in the index this coming week but like with the other indexes, two-way trading is now likely. Nonetheless, it seems probable that for the next couple of weeks, the SPX will be narrowing its trading range to somewhere between 840 to 985.
It seems probable that a temporary bottom has been found and that a corrective phase will begin shortly. Both the DOW and the SPX have so far been unable to break below their previous intra-day lows and after the unexpected non-break of support on Friday, it seems unlikely that new intra-day lows will be made this coming week. The end of the month is upon us, and therefore likely that some type of window dressing will be seen.
Nonetheless, it is also evident that there are few bulls willing to step up to buy aggressively at this time, and therefore rallies of consequence will be tough to maintain. On the other hand, Friday's action also uncovered that panic selling and forced liquidation of margined positions has come down to a bare minimum and that further downside from this point on will be labored.
It is now likely that two-way action will begin and that volatility will diminish as the week goes on. It is also likely that the close next week will be higher than this weeks close and that should calm the markets even than much more.
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Stock Analysis/Evaluation
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CHART Outlooks
Due to the failure of the indexes to break down on Friday, the probabilities of a low being in place have now increased. In checking over 80 stocks this week, I get the definite impression that things are way overdone and not likely to continue to the downside much more. There are a couple of buy mentions this week in stocks that have shown some resiliency over the past few weeks and that would be likely to generate some kind of a significant rally once the indexes have bottomed out. Mentions will include desired entry points below Friday's close, indicating the probabilities of lower prices at some point during the week. Nonetheless, these mentions are in stocks that have a high probability rating even though the selling pressure will likely continue for part of this week.
AXP (Friday close at 24.05)
AXP showed a lot of resiliency this past week by being one of only a handful of stocks that was able to close higher on Friday than last week's close. In addition, the stock got down to a major 11-year support level and was able to hold itself above it and rally, generating a signal that the downside could be over.
AXP is also a well-run blue chip company that will likely be among the survivors of this economic debacle. As such, it is one of the first companies where speculative money will flow to when the market has turned.
On a weekly closing basis, support is major between 21.49 and 22.42 (19.55 and 21.18 on an intra-week basis) with two major weekly closing lows having been made between those levels over the past 11 years. Additionally, the close made last week at 23.33 (20.50 intra-week) must also be considered support. On a daily closing basis, there is strong support at 23.15 where a double bottom has been built. On a weekly closing basis, there is absolutely no resistance until the 31.50 level is reached. At that level you can find a previous high weekly close at 3152 going back to Jan99 as well as the 200-month MA at that same price. On a daily closing basis, though, there is decent resistance at 26.39 and strong resistance up at 28.19 where a previous high close of consequence is seen as well as the 20-day MA.
AXP also showed strong resiliency this past week in spite of the indexes being under strong pressure. The stock has a weekly low at 22.02 and did not get close to the low seen 2 weeks ago at 20.50. It is evident on the charts that $20 represents a level that is not likely to get taken out and with the stock near that level, it presents an opportunity that offers a good risk/reward trade.
Purchases of AXP between 22.43 and 22.90 and placing a stop loss at 20.40 and having an objective of 31.50 would offer at least a 4-1 risk/reward ratio.
My rating on the trade is a 7.5 (on a scale of 1-10 with the strongest probability rating being 10).
K (Friday close at 48.25)
K is one of the few elite blue-chip companies that has been able to maintain itself in a weekly up-trend in spite of the collapse of the stock market. In addition, the stock is in an industry (consumer staples) that most analysts predict will hold value during this economic debacle.
K has not yet broken any previous weekly closes of consequence and has been able to maintain itself above the 200-week MA as well, contrary to what most other company's have done. In addition, the stock has re-tested successfully the low made two weeks ago and is in the process of generating a second successful re-test of that level, if the stock is able to close in the green on Monday.
On a weekly closing basis, support is very strong between 47.26 and 47.59 from two previous major weekly low closes. Support is also strong at 48.49 from the most recent low weekly close as well as from the 200-week MA. On a daily closing basis, support is very strong at 48.31, again at 47.89, and major at 47.50. On an intra-day basis, support is major at 45.25 and very strong between 46.25 and 46.68. On a weekly closing basis, resistance is decent at 50.50 and then again a bit stronger at 52.00. Major resistance up at 54.22. On a daily closing basis, there is very minor resistance at 49.90 from a previous high close as well as from the psychological level at $50. Above that, there is decent resistance at 50.85 and then quite strong at 52.27.
It is evident that the daily and weekly closing support between 47.50 and 48.00 will be very difficult to break without a major collapse in the indexes. In addition, K is still in a weekly up-trend that may or may not be coming to an end, but nonetheless, it is highly unlikely that after the indexes have already broken down so dramatically that this stock would now get into a downtrend. The probabilities favor a sideways phase with a possible trading range between $46 and $52 for the next few weeks and/or months.
It is likely that this coming week K will be generating a drop below last week's low of 47.25 as a re-test of the intra-day low seen 2 weeks ago at 45.25. Drops down to the mid-to-high 46's this week, seem possible and perhaps even probable.
Purchases of K between 46.70 and 47.00 and using a stop loss at 45.15 and having an objective of 52.77 will offer a risk/reward ratio of almost 4-1.
My rating on the trade is a 7.5 (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 this week got down to an intra-week support level of consequence between 7.37 and 7.64 with a drop down to 7.51. In addition, on an intra-day basis, the area from 7.64 down to 6.94 is considered major support. The stock did receive some positive fundamental news this week that generated a rally up to the $10. Nonetheless, with the pressure on the indexes, that rally could not be maintained. On Friday, the stock did drop down to the 7.51 level but closed $1 higher and near the high of the day even though the indexes received some selling at the end of the day. It seems likely that the stock has found a low and even though drops back down to the high $7's could be seen on further weakness of the indexes, it is likely the stock will begin to rally before the end of the week. Resistance continues to be strong at 10.39, on a daily and weekly closing basis. AA broke below the $10 level this past week and dropped down as low as 9.05. The area between $8 and $10 proved to be a strong support level for 3 years back in the mid 1990's. It is likely that a bottom has been or will be found this week. The monthly close will be seen on Friday, and the monthly chart shows strong support at 9.75. It is probable that level will not break. I see no indication that a rally is forthcoming so there is nothing to be done at this time but hold on to the positions waiting for some sign the stock is ready to recover. KGC broke below all the supports, both intra-day and on a daily and weekly closing basis this past week. The stock dropped all the way down to the 6.95 level before turning around to close out the week at 8.81. Nonetheless, a daily and weekly close above 9.07 is needed to reverse the negative action seen this week. The stock did close near the highs of the day and therefore should see some upside follow through this coming week. The stock did leave a gap between 10.40 and 10.10 that should be closed this week. Resistance is minimal until the 10.75 level is reached. This stock should show some bounce this week as the fundamentals are not so negative as to support the stock staying at these lower prices for long. AXP (see mention above). CAG followed through on the break of the intra-day support at 17.50 with a drop down to 16.61. On a weekly closing basis, there is major support down at 16.12 so it is probable that if the indexes show some weakness this week that this stock will drop down to that level. Nonetheless, this is a food staple company that should be among the companies that will survive the economic ills affecting this market. It is likely that a bottom will be found this week from which the stock can generate a correction upwards. On the daily chart there is no resistance until the 18.50 level is reached. TRA hit a lot of stops when the stock broke through a long standing intra-day support level at 16.25 and dropped down to 15.32. Nonetheless, this is a stock that has been showing a lot of resiliency during this drop in the indexes and after making that low, the stock rallied over $3 from the lows and closed near the highs of day. The stock did not confirm the break as it closed above all the supports from 2007 between 16.25 and 18.03. In addition, with the close in the green, the stock confirmed that last week's close at 18.08 was a successful re-test of those lows. The stock does have a gap between 20.42 and 20.23 that should be closed this week. Drops back down to the 16.61 level are possible but should be bought. Any close above 20.61 would be a strong buy signal. MT broke below a decent daily close support level from 2005 at 22.25 and fell all the way down to the strong psychological support at $20 (dropped to 10.50) before rallying to close out the week a few ticks below the previous support. It is evident that a daily close above 22.25 is needed before this stock can begin to generate a turn around and short-covering rally. Should that occur, a rally up to the $28 to $30 would be likely. At this time, there is no chart indication that the stock is ready to do that and if the indexes are back under pressure at the beginning of the week, it is likely the stock will drop back down to the $20 as well. VLO broke below a previous intra-day low of some consequence at 15.90 with a drop all the way down to 14.53. Nonetheless, the stock was able to close above that previous intra-day low with a close on Friday at 15.96 but still below the daily close at 16.06. A daily close above 19.30 is needed to turn the stock around. RIO got down to the $10 level this week with a drop to 9.99. Nonetheless, the $10 level was a major level of support from 2005 through 2006 and should act again as such now that the indexes may be confirming that a bottom is in place. The stock did make a new low daily close on Friday and finds itself on the defensive waiting to see some positive action from the indexes. At this time, there is no chart reason to be a buyer. Nonetheless, the action in the stock around the $10 level seems to be supportive and if the indexes hold above their previous lows, this is a stock that should generate a rally this week. WDC had a very bullish earnings report this week and after a lower opening on Friday, managed to close much higher and near the highs of the day as well as above the previous low daily close. The stock was even rallying on Friday when the indexes were still near the day's lows. It is possible that a drop down to the 13.40-13.85 level will be seen if the indexes show some additional early week weakness. Nonetheless, the rally on Friday was bullish and a rally up to the 16.00 level is highly likely for this week. On a daily closing basis, there is strong resistance at 15.92, but should the stock close above that level, there is little to stop the stock until the $20 level is reached. The 20-day MA is currently up at 16.52 and on an intra-day basis, that level could prove troublesome. I almost made this another mention this week. The problem is the risk/reward ratio is not great as the stock would need to be purchased around 13.80 and a stop placed down at 11.90. Squeezing the upside, the objective would be a rally up to the $20 level, making the risk/reward ratio at best 3-1.
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6) NUAN - Purchased at 8.30. Averaged long at 12.20. No stop loss at present. Stock closed on Friday at 8.52.
15) SGR - Long at 15.32. No stop loss at this time. Stock closed on Friday at 14.07.
16) TRA - Long at 19.24. Averaged long at 19.12 (3 mentions). No stop loss at present. Stock closed on Friday at 18.85.
17) AXP - Averaged long at 24.33. No stop loss at present. Stock closed on Friday at 24.05.
18) VLO - Long at 16.91. No stop loss at present. Stock closed on Friday at 15.96.
19) AA - Averaged long at 18.805. No stop loss at present. Stock closed on Friday at 9.41.
20) RIO - Long at 11.74. No stop loss at present. Stock closed on Friday at 10.50.
21) CAG - Long at 19.40. No stop loss at present. Stock closed on Friday at 16.81.
22) BA - Averaged long at 47.68. No stop loss at present. Stock closed on Friday at 45.24.
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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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