Updating/weeding out the list

Today the market had very respectable and possibly encouraging gains. But judging from the volume on the major index ETFs, trading was not heavy enough to look at the day's action as a convincing change of sentiment in the market. This images shows a daily chart of the three majors since November with a 30 day Moving average. All of them have areas of likely resistance to overcome before any serious bullish posture could be entertained again. In addition to resistance levels from price action, the descending 30 MAs might just might provide another influential nudge to the down side.
It should be noted that they all are in a double bottom reversal pattern, but there are a few things to consider. 1) The pattern is meaningless until the resistance from the high between the two bottoms is broken. 2) A bullish reversal should come at the bottom of a bearish trend. The recent bearishness is really just the first breakdown of a very bullish trend and not yet a trend with lower highs and lower lows(I'm looking at SPY on a daily closing basis). So, looking for an upward "reversal" seems a bit premature.
(Click for a larger view.)


While the market is sorting itself out, this is an ideal time to rebalance our lists. Everyone should be working on a bearish watchlist. Despite the current state of things, I think we should always focus on the primary watchlist for the group as a bullish watchlist. After all, that direction is the ultra long term bias and nature of the market. Besides, many people may not be interested in or comfortable with shorting the market or trading bearish. When the market does resume its strength, we want to be ready with a list of well chosen stocks that are likely to be among the first and strong participants of a new rally. But first we've got to get rid of the current stocks that are less attractive at this point.
I mentioned a few thoughts about trimming down our list a few posts ago. Here's a complete run down on what I think should go and what should stay.
First: here's a look at the list and how it scores in the Investools Phase 1 and Phase 2 analyzer.


The simplest way to start is by getting rid of KBH, UNT and ZMH because they have a combined F/E score of less than 3.25. I'm a bit sad to see ZMH go, particularly as it continues to work on a new 52 week high. But the growth estimates is less than our ideal 20% and it is estimated to grow at a pace slower than its group this year and also in the next 5 years.

Also, because the Estimates score is forward looking, we'd prefer for that score to be the stronger of the two, if possible. For that reason, I'd also like to see CRDN, WCC, and BHI leave our list.
CRDN - Growth estimates are a low 7.5%. Also estimated to under perform its group this year and next. Set an alert on this one for when it breaks 62.50 and forget it.
WCC - Growth estimate is less than 20% and it is estimated to under perform its group this year and next. It's been in a range between 55 and 70 for about 9 months. Set an alert to notify you if it goes above 70 and forget it.
BHI - It is actually very attractive from a valuation standpoint. PEG is .45 with a P/E well under its group. But the most recent earnings miss and the current and next year's estimates for earnings growth well below the group look like red flags. The chart is a mess with the gap down on the recent earnings announcement. It has also not participated in the latest rally attempt in the Oil Services.

The others:
ICE - Has had an incredible run and the trend has broken. PEG of 2.19 looks a bit overpriced. I'll be looking for potential bearish entries on this on a bounce down from 135 or a break of 125.

NTAP - It had a strong reaction to the recent earnings announcement in February but couldn't follow through and with the market selloff on the 27th, it gave back all the gains from the earnings jump. 36 remains important support, recently confirmed by a nice hammer formation. But once that breaks, things don't look good. Again, this has a high PEG of 2.24. Institutions own 87% of the shares outstanding on this stock. Once they start selling, look out below.


HWAY - This stock has just been boring! The fundamentals are still quite good, but I'd like to get rid of it if or no other reason than that it trades well below an average 1 million shares a day. As a result, there's not a lot of open interest throughout the options chain.

VSEA still looks to be a reasonable valuation with strong fundamentals. So I don't see great fundamental reasons to take it off the list. But I'm nervous about the chart. It has seen great gains in the last 8 months. More impressive is the strength of its chart compared to the SOX index in the last 4 months and it is now working breaking recent resistance to an all time high. But the chart looks like it could be ready to roll over. It broke a long term trendline in January and rallied back up to find resistance on the underside of that line. It now looks to be in an ascending wedge, which tends to resolve to the down side. With a big bearish engulfing candle strengthening resistance at 50, a reversal could be at play here.


CWTR - Though the fundamental scores are still pretty good and the valuation is actually quite attractive, I think this industry comparison chart says it all. GONG!

RIMM is pretty expensive, but it has held up impressively in the recent market selling. We should wait to see what happens at the earnings announcement on April 4. Or maybe we should not include stocks over $100. Thoughts?

In Summary, here is my recommendation for the list:
KBH Cut
UNT Cut
ZMH Cut
CRDN Cut
WCC Cut
BHI Cut
ICE Cut
NTAP Cut
HWAY Cut
CWTR Cut

Keepers(for now)
VSEA Give it the benefit of the doubt until it breaks down
RIMM Hold 'til earnings, at least
COH This actually has 3 green arrows right now
AAPL Apple rolls out a bright iFuture
CTSH Just ranked 15th in the Businessweek 50 best performing companies. Setting up for a new batch of green arrows.

So how does that strike you? Please let me know if this assessment of things is agreeable or if you see certain stocks differently than I and would like to take different action. Once we agree on the stocks to get rid of, we can begin to find replacements. We still have over a week until our next meeting, but perhaps we can get some ideas flowing between now and then. If you respond with ideas, I'll try to respond and include charts. If you want to mock up a chart with what you're seeing, I'd be happy to post that too on that blog.

List Performers

Since this post followed so quickly after the last one, I just wanted to point out that Jim left an insightful comment in the comments area for the last post on Oil. Check it out. And don't be shy about leaving your own.

So far, the 40/45 March Bull-Put spread on COH I suggested a few posts ago is looking good. I'm not going to claim victory just yet, as there's plenty of time before expiration, but it's nice confirmation when things begin to work as predicted from the start of a trade. (I'm paper trading it, so I'll let you know how it comes out.)
COH has put in a new high now and while it may keep firing higher, it would be prudent to look for a cleaner entry. The MACD and Stochastic have yet to turn lower, but I would imagine one or both will in the coming week as the stock regroups for further upside. With 5 up days in a row, it is reasonable to think there might be a bit of a healthy pull back needed. Also, I like to keep old trend lines on charts for a while to see how the stock reacts to the backside. You can see that the stock is coming right to the underside of the recently broken 5 month trend support. Given the angle of the line, I don't see it as some scarey point of reversal. It just seems a healthy reminder that stocks aren't supposed to go Parabolic and this one could use a few days rest. If it pulls back toward the MA and puts in a higher low, that would be a great entry. I will look to 45 for new support.
(Click for a larger view)


CRDN is in a group seemingly trying to fight its way out of the red. Notice that the Group Rank in Phase 1 is showing 64. After not a lot of follow through on selling after an analyst downgrade, we see a potential double bottom reversal pattern which would give a nice buy signal in a move above 55. This would also be very close to a fresh third green arrow on the MA. With earnings on Feb 26, this could be a nice short term trade up to 60 or so.


Earnings coming out tomorrow on CTSH and the chart looks very healthy. Of course buying on a pull back would be ideal. There's very nice, clear support at 82.50. Use this to define your risk and position size.


I'm feeling good about replacing ISE with ICE. Friday marks a new high for ICE on above average volume while ISE had a down day to erase much of its rally attempt the prior day. We'll see what earnings this week bring for these stocks.


The homebuilders have been doing very well lately and our KBH has been moving right along with the pack with a new high for the last 8 months on Friday. It's not quite ideal to buy after a week of very strong action. But the strength serves as confirmation that people are continuously embracing these stocks again. A target of 60 seems inevitable in the coming months. The trick is to get the entry correct.



RIMM has been moving sideways lately with some very toppy signals to it. The recent earnings announcement was met with a heavy volume and huge bearish engulfing pattern. Then a rally attempt at new highs was harshly batted down from resistance on big volume again. A few noticable up days this week look like another attempt is being made, but the volume has been less than average on those days. I won't have a whole lot of hope for this stock until it can convincingly break through the 140 area. Until then I will be looking more closely for a potential bearish position here. Obviously a bounce down off the 140 area for a triple top pattern would be a nice entry.
Paper Trade: On December 22, the day after the earnings announcement, I used the bearish engulfing as a signal that sentiment on this stock was changing. With a lower high also in place, I sold a January 140/145 Bear Call spread for a credit of $1.47. It expired worthless for a return of 41% in 4 weeks. The first week of January was a bit worriesome, but I held because it had not broken the resistance yet.


WCC had a stellar earnings announcement accompanied by news of a $400 Million stock buy back program. The market obviously liked this with some heavy volume gains. Notice that the day before earnings were announced was already an optimistic move. At this point a pullback would be a better place for an entry. 62.50 would be a good support level or maybe the MA will come up to provide support somewhere else. A move above the 69-70 area will be the real signal that this stock is going places.



ZMH is pulling back for a nice entry. 80 would be the most obvious, perhaps strongest support to look for now. But an entry on a bounce of the 82.50 level, the low of the day it gapped up, would be nice and clean. Don't forget the big volume spike that accompanied the gap. This is a major sign of sentiment on this stock.



But don't forget to look at the long term chart on ZMH. The 90 area appears to be potential resistance. What I'm thinking is that it might be nice to buy stock or a deep ITM, Long term call option here around 80 or 82.50 and then sell 90 calls as it approaches that level if it struggles with resistance there.


Have a great week.

Scrolling through the list

As the Nasdaq is looking ever more questionable and the SOX has definitely broken its uptrend support line, AAPL seems to have broken down in perhaps a very significant way. It has Definitively lost the horizontal and diagonal support and now it looks like the 50 MA too. That makes three strikes. Next likely support is at 78. The 200 MA is all the way at 70.

(Click images to see them larger.)



BHI is holding above 74.50 support and the 200 MA. Yesterday's inverted hammer made a bullish Harami.



The continued strength from COH warranted a mention from Mike Coval in Wednesday's Market Commentary.



CRDN is in a bull flag and holding above the 20 MA.



CTSH has a trend that looks a little long in the tooth and might be ready to break its Uptrend support and the 50 MA in one shot.



CWTR doesn't look very pretty and just bounced off the underside of the 200 MA. Chart shows a couple bearish divergences with the MACD in the last year. Interesting to see how common these are and how powerful a signal they seem. Here's an article on the subject.



HWAY looks to be warming up to breakthrough the 200 MA with the help of the 20 MA and support just below at 46.50.


ISE looks more likely to test the 200 than climb back up to the 50. The intermediate uptrend is coming in jeapordy with a test of the latest low.
A few posts back, I suggested a 50/45 bull put. I paper traded it and on the break of the support line closed it for a small loss.



KBH seems to be respecting the 200 MA and looks inclined to use it as support now. There is decreasing volume on the pullback from the recent high.



NTAP is right a the crux of testing horizontal and diagonal support and shows a potential double top with a bearish divergence on the MACD. Volume spikes recently have been on buying days.



RIMM had earnings today after close. There are a lot of writers pointing out overvaluation. The stock has more than double since August. But with earnings coming in at a penny more than the analysts' expectation, the stock was up over 5% after hours. Here's a good summary of the announcement.
With a fresh bounce off the 50 MA, if Friday closes up above 141, this could be a nice bullish entry for further upside movement. A Bull Put spread might be a nice conservative approach.
Implied volatility on RIMM ran up above 55% into this announcement. Perhaps there will still be a nice level of it to sell tomorrow.



UNT still has a longer term downward bias, but may find support at 48.80 and its 50 MA.



VSEA broke out big today, 5.7% on a day when the SOX is down 1.3%. Only news I could find was of a live webcast for their coming earnings announcement in January.



WCC looks to be having trouble. Continued selling today on big volume. 56.50 is likely support. Peter R. at Shadow Trader always says that volatility contraction leads to volatilitiy expansion. Notice the three Moving Averages coming together over the past few months. With the price now below the 200 with the others likely to follow, could this be the beginning of a more meaningful move down?
Perhaps a bounce a bounce off the 56.50 area support level could be played with a bull put spread for a bounce with the intention of buying back the short on continued breakdown.




ZMH wants to go higher though couldn't quite make it beyond resistance today and formed a shooting star which technically still needs confirmation, though the past few weeks have shown a number of bearish candle patterns.



It's interesting to look through the list and find that I'm still bullish in the short term for 10 of the 15 stocks. However, some of those "bullish" stances could easily change very soon: NTAP, CTSH, CRDN

Indexes and some of our list.

I hope everyone had a good weekend. I'll be going to an Advanced Technical Analysis workshop in near D.C. this week, so postings will probably be on the less frequent side. However, I've put together a pretty lengthy post here which should give you plenty to chew on for a while.

Don't forget to check for the key economic events for the week ahead. You can find key events, earnings announcements and splits for the coming week in the "Week Ahead" page found in the left column on the "Strategies" page on the the Investools site. Otherwise, for a simple view of economic events, click here. There you can click on each event for a link to more info.

Taking a quick look at the major indexes, the SPX looks quite strong, continuing its trend with higher highs and higher lows. One potential bit of caution is Friday's shooting star which would be validated as a potential reversal point or resistance level with a gap and close down or big black candle for monday. This would be consistent with the current channel resistance.

(Click images to see them larger)


The VIX index has been very volatile since breaking the downward resistance line. Now it's back to lows and has used it as support on friday. Until this index makes a meaningful move above the 13 area, I won't get too excited about prolonged bearish action in the market.



I don't usually pay too close attention to the Dow or place a lot of weight on it as an indicator of market direction. Regardless, it is interesting to note that while it did break horizontal resistance to a new high this week, the old trend channel support may now act as potential resistance. There is also a shooting star of sorts, though not quite the ideal with its upper shadow less than twice the length of the body.


As for the Nasdaq, though not in the most convincing way, it did close above the recent lower high and the pennant formation. It doesn't seem to have great momentum at this point, but the bias remains up.



The Market Forecasters shows the intermediate lines on both charts moving up in the upper reversal area, so these are read as bullish. Regardless with the market trends still clearly in tact, this stochastic indicator is not yet quite ideal for these conditions.

From our list:

AAPL is in a good position for a low risk entry ( i.e. near support). However, "Apple Computer Inc. said Friday it has delayed filing its annual report with the Securities and Exchange Commission due to its ongoing investigation into stock option grants." So it wouldn't surprise me if investors were a bit lukewarm on the stock following this news.



BHI has broken decisively above the 75 resistance area. All those who bought in under that level have been validated and are now sitting pretty. Getting in now near the 75 area would be ideal on a test of support in coming days. The P/E of 11.3 shows a discount to the Group's P/E of 22.4. With growth expected at 23%, that gives us a PEG of about .5. Seemingly too good to be true. From what I can tell, there seems little reason this stock shouldn't revisit its high and likely go further. Very good also to see the group moving quickly up the Big Chart in the past few weeks.



Our other oil stock, UNT hasn't quite broken the longer term downtrend convincingly, so it's still in the dog house with me. There is also a bearish divergence between the higher high in price and the lower high on the MACD.



CRDN looks to have support at 55 and some potential resistance 56.30 or so, but nothing blatant until the high around 62.50.



COH appears to be easing its momentum a bit in keeping with its group rank on the big chart. However, it is still in a nice, healthy uptrend after breaking two significant resitance levels with volume. As it move into its uptrending support line and the 30 MA, this might be a very good place to look for a bounce entry to ride a run up in anticipation of its earnings announcement on Jan. 22. This could be a good time to look at buying options too as the Implied Volatility is at a low point and it will likely start to rise approaching the earnings announcement. This will inflate the premium in the options.



ISE somehow doesn't quite look like it's going to break through this ceiling. It's strangely back below the high from back in March and the big volume jump to a new high with volume on 10/25 after earnings didn't quite set off a new move. 55 remains as resistance. All that said, the uptrend is still in tact and we have just made a successful bounce off the support line. Good entry point using Friday's open as a support line and the trend line as an exit signal. Makes for a risk reward of 1/5. VERY GOOD. Also, a Jan 45/50 bull put spread for roughly $1.55 credit could be very successful using the same lines as an exit.


KBH will be a difficult one to play, I think. The homebuilders do seem to have put in a bottom for the time being and have pulled above that area with an accompanying rise up the big chart. However, Friday's Big Chart rank did show a slight pullback as there is considerable overhead supply with lots of potential resistence every step of the way. KBH may see the nice round number 50 as support now, but there seems resistance at about every $5 incriment as we go up. That's not necessarily a bad thing as long as we can get in near support levels and get out at each target. For now, I'll leave this alone and expect a more sideways bias.



NTAP broke back above 40 on Friday with considerable volume(see 11/21 for a "fake out"). Perhaps it will now hold as support. We've now got three fresh green arrows with recent volume spikes being buying days.



It will be interesting to see what happens with RIMM after its earnings announcement on Thursday. It's in a strong uptrend about to receive a third green arrow on the MACD.
This article makes for a case of overvaluation which seems quite believable seeing as the P/E is twice that of its group and it has a PEG of around 3. (Here's a good link for an explanation of P/E and PEG.) Perhaps we can watch this for a bearish play if it breaks the uptrend support.


Okay then. I think that's enough for now. I would love to see some comments on all this, if nothing else, just to let me know people are in fact reading, thinking about and questioning this all and not just glancing at it.
Have a great monday! :-)