 StreetAuthority Swing Trader Sample Trading Ideas for Monday, February 10th, 2003 Here at StreetAuthority.com we're pleased to bring you several short-term trading recommendations from a special guest expert -- Dr. Melvin Pasternak. Melvin comes to us with more than 40 years of investing experience, having made his first trade in 1961. Along the way, he has spent more than a decade teaching classes in technical analysis for TD Waterhouse and has designed and taught stock market classes at the college level. On the educational and journalistic front, Melvin holds both Ph D. and MBA degrees and has previously written regular financial columns for a leading international website. DR. PASTERNAK'S INVESTING
PHILOSOPHY This week Melvin has been kind enough to provide us with
several potentially profitable short-term trading recommendations, as well
as an abbreviated version of his regular weekly newsletter... IN THIS WEEK'S ISSUE: 1. THE PRIMARY TREND Last week I stated that my target for the down leg we are in now is 780 to 790, but that I expected the August and October S&P lows in the S&P to hold. That key support level is 768-775. If those lows are taken out, then we can rapidly adjust. There is not a lot of downside between 780 and 768! 2. INTERMEDIATE AND SHORT-TERM TRENDS Following the January 24th break of 868, the S&P again tested this level on January 29th. The rally failed and the S&P traded down to approximately 845, where it found short-term support. The 845 level corresponded closely to the important psychological support areas of 8,000 on the Dow and 1,300 on the Nasdaq. As the daily chart shows, S&P 845 has in turn become a solid short-term barrier, one that the market will need to overcome in order to right itself.
3. A LOOK BACK AND A LOOK AHEAD THE WEEK THAT WAS Tuesday saw the market sell off very sharply in the first hour and find support at 840. A hammer candlestick signaled the beginning of a rally, which peaked on Wednesday. The peak -- you guessed it -- was again just above 860. A fairly strong selloff began about the middle of Wednesday's trading day. It continued in the first hour of Thursday and brought the index down to 833, from where it staged a mild recovery. Friday's jobless numbers temporarily lifted the market. Again, however, it quickly ran into resistance. Note the star candlestick in the first hour of trading with the upper shadow probing into the 845 resistance, but unable to hold. Again a persistent selloff ensued, taking the S&P to new lows for this down leg at the 827 level. A tepid rally near Friday's close then brought the index back to near 830.
THE WEEK AHEAD The path of least resistance is down. I think the S&P will be drawn somewhat magnetically to 800 -- then perhaps bounce -- and ultimately drop below that level. Meanwhile, Hans Blix's testimony should put a cap on any rallies. After that the drums of war are apt to beat louder than ever. For me, the near-term course is clear -- be short or be out. TRADING IMPLICATIONS I've discussed three stocks below: brokerage firm Lehman Brothers Holdings (LEH), casino operator Harrah's Entertainment (HET), and Silicon Image (SIMG), a manufacturer of specialized semiconductors. All three have broken important support and have been showing declining strength relative to a weakening market. SELL SHORT: HARRAH'S (HET,
$33.16) While most stocks found their bottom in October, Harrah's instead hit its peak around then (at about the $50 mark). In the middle of October it traded down to $40, a support level marked by the hammer candle that occurred outside the Bollinger band. This showed the stock was very oversold.
HET rallied, but then drifted down, breaking $40 in mid-November. We saw some buying interest at $37.50, and this new support of $37.50 held until early January, when Harrah's gapped down to $35. Note the large white candle on that day and the enormous volume. $40. $35. This casino operator seems to like round numbers! (And the next round number is $30.) From $35, a brief rally carried HET back to around $38, where it once again began to slowly drift toward $35. In late January, the $35 mark served as support. That level was broken, however, on Wednesday of this past week when Harrah's announced slightly lower earnings. The shares were also hit by a New Jersey plan to raise taxes on gambling profits. The stock remains in a sharp downtrend and it has just
broken below support from a descending triangle -- a bearish formation. With
any market weakness, it should retreat to $30 -- the level it broke out from
in October 2001. All the indicators say oversold, but show no signs of
turning. My target on HET is $30 and I have suggested selling at $30.10. The October bottom provided a great buying point for followers of LEH. From a low near $40, the shares rocketed to near $60 in just seven trading days. Along the way, LEH left two gaps, one at $45 to $47 and the other at $50 to $52. I've labeled both of these gaps on the chart below.
During this period the stock created a flag formation, which consists of a near vertical rise and then a short period of downward sloping consolidation that is often in the shape of a parallelogram. In early November, the bottom of this parallelogram was reached with support at about $52. From the $52 support level, LEH rallied to an overbought high north of $60 in November and since that time has basically been in a volatile sideways consolidation. In mid-January the shares tested resistance at $60 and have been drifting down since. The close on Friday of $51.40 is an important break of the key $52 support and should see the shares eventually test the second (lower) gap in the mid-$40s. Resistance exists just above $55 where I have placed the stop. The indicators say oversold, but do not point to an imminent reversal. ---------------------------- SELL SHORT ON STOP: SILICON IMAGE
(SIMG, $4.80) Silicon Image is a manufacturer of specialized semiconductors. The shares are extremely volatile and frequently exhibit large swings. For example, the rally off the October bottom carried SIMG from $2.20 to $7.50 in approximately 30 trading days, a move of 300%! From mid-November to late December, SIMG corrected from the $7.50 high and hit a bottom near $4.80 toward the end of the month. This bottom was made on a hammer candlestick, and the rally, which lasted to mid-January, took the stock to a new recovery high of almost $8.
Although the price hit a new high in mid-January, the rate of change indicator clearly showed negative momentum divergence, a warning of a coming price decline. (I will explain this concept more fully in future issues of the StreetAuthority Swing Trader.) Since that time, the shares have been in a steep downtrend and have broken below the $4.80 support level. There is an additional zone of support between $4.63 and $4.80, and the shares have traded almost entirely within this narrow range over the past four trading days. An attempt to test $5 failed on Friday and SIMG closed right at $4.80. The strategy on this one is a bit complex. Put in an order to sell short only if SIMG breaks $4.52. If it does, then there is some support at $4. Below that there should be no meaningful buying until about $3. If you do short the shares when they break below $4.52, then immediately enter a stop loss at $4.85. Stock: H&R Block (HRB, $35.77) HRB drifted down during the week to a key support level just above $37.00. As predicted, on Friday the stock finally violated support. HRB remains in a strong downtrend and closed just off its low for the week. I have lowered my stop to $37.05, which assures we will lock in at least a modest profit on this trade. I have also adjusted my target price from $34 to $33. In last week's analysis, I argued that a break of key support of $37.50 should lead to rapid deterioration in share price, and my opinion hasn't changed. DISCLOSURE: I shorted HRB in my personal account on Friday, February 7th with the break of support. ---------------- Stock: Petro-Canada (PCZ, $31.48) After our entry, PCZ traded to just north of $34 and then declined thanks to a wave of profit taking. It is holding well above the 20-day moving average of the Bollinger band, and there is good support at $32. As I stated, this stock is not a quick mover. Eventually, however, it should hit our target. ---------------- Stock: Aeroflex (ARXX, $5.97) In my last issue I commented that ARXX was a strong stock in a weak market. Accordingly, I raised the stop from the mid-$6.00 range to $7.55. I'm glad I did, as ARXX hit my revised stop early in the week. It is now testing $6.00 and threatening to break this level. There is support at $5. If we see a rally in the broad market, then I may be interested in going long from that level. 6. STOCKS TO WATCH IN THE COMING WEEK LUCENT (LU, $1.64) -- I was watching for a possible breakout at $2.00. I've concluded it's not happening any time soon. Oh well... at least watching doesn't cost money. I'll continue to monitor LU, but have decided to remove it from this watch list. CITRIX SYSTEMS (CTXS, $11.83) -- I was on the alert for a breakout above $15.00, but this probably won't happen soon either. There is support at $11.00. If it holds support, then it could make an excellent swing trade from the long side. CTXS remains on my watch list. NEXTEL (NXTL, $12.65) -- This stock must be the pig that lives in the brick house -- at least so far. No matter how hard the big, bad market wolf blows, NXTL won't decline. I'll be watching closely when earnings come out February 20th. My original goal was to buy at support, which is about $11.30, but I may need to change this strategy. HARRAH'S (HET, $33.16) -- In the last newsletter I suggested Harrah's as a short candidate. Key support was broken this week. HET still appears to have further to fall. As such, I've recommended as a short in today's issue (see above). GLAMIS GOLD (GLG, $11.99) -- What gives with gold stocks? With the war jitters they should be soaring, but instead they've stalled. Glamis' weekly candle is a very bearish gravestone doji. It looks like a good short, but given the geopolitical situation, this one is only for the stout of heart and for traders who watch the market very, very closely during the day. Support is at $10. If GLG trades back to this level, then I may consider going long at that point.
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