 StreetAuthority Swing Trader Sample Trading Ideas for Monday, February 24th, 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 market commentary and several potentially profitable short-term trading recommendations... IN THIS WEEK'S ISSUE:
1. THE PRIMARY TREND On the positive side, the stochastics indicator is attempting a rally. It has, however, not yet been able to rise above oversold territory. RSI has held above the 30 level, but faces resistance at the 50 level. All in all, the current rally should be viewed as a countertrend bounce in an ongoing bear market.
The rally that began at 806 on Thursday, February 13th continued in full force last week. Resistance is now being encountered just above the 850 level. This point is technically significant for several reasons. First, it marks the approximate midpoint of a consolidation area between about 840 and 870 that the index hovered in subsequent to breaking critical support at 868 on January 24th. Second, the downward sloping 20-day moving average is now in the low 850's. An important downward sloping moving average such as the 20-day often provides resistance to a further advance.
On the positive side, daily MACD has given a buy signal and the 4-period moving average has crossed over above the 9-period moving average. The daily MACD signal, however, should be interpreted within the context of the weekly sell signal pointed out above. As I stated in last week's issue, if the S&P manages to get through the 850 zone of resistance (where it currently stands), then I think it will run into a wall at 868, the break of the previous major support level. The declining upper end of the Bollinger band should also reinforce resistance at this level. If these were normal times, then I'd say the probability of the S&P falling at or near 868 would be close to 100%. But given the effect that Iraq is having on the market, these are not normal times. The possible wild card in my analysis is the war. If the market believed the war would be won decisively and quickly (or that it might not happen at all), then the S&P could post a relief rally irrational in its exuberance. According to technical analysis, old support, when broken, should become new resistance. If this principle does not hold, then the market will be communicating a significant message. Traders should be aware that a decisive penetration of 868, if it does happen, could lead to a very sharp rally, fueled by both short-covering and fresh buying. Be alert to that possibility. I still believe it is the low-probability outcome, but I do want to acknowledge this possibility and be prepared if it does happen. Current support on the S&P is about 830 to 840. A breaching of the 830 level would do serious damage to this countertrend rally. In last week's newsletter I stated that the short-term rally was likely to continue when the market reopened on Tuesday, February 18th. It did, scooting from the mid-830's to just above 850 in four trading hours. From mid-day Tuesday to early Friday, however, the S&P drifted lower with support in the upper 830's and a spike low at 831 on Friday. The index closed for the week at 848, a few points below short-term resistance at 852. At the close, hourly MACD had given a buy signal and hourly and stochastics were overbought, yet had not given a sell signal for the hourly time frame.
The 30-period moving average was sloping upward -- a short-term bullish sign -- and is now providing support at around 845. As previously stated, it would not be unreasonable for the index to test the 868 level, and it could do so in the trading week beginning Monday, February 24th. If it does get to this mark, then swing traders should follow the action extremely carefully. If the S&P does hit a ceiling at 868, then the better part of this countertrend rally will have already been accomplished. I am not comfortable holding long positions in the vast majority of stocks that are highly correlated with the S&P, yet it is too early to short aggressively. One stock that looks attractive to me from the long side, and which is not overly correlated with overall market performance, is oil services giant Schlumberger (SLB). It has broken a downtrend line and looks like it is heading higher. Limited Brands (LTD) is a weak stock in a weak retailing group. I think a rally to 868 will result in fairly minimal price appreciation for the stock. As such, it can be shorted on Monday, February 24th. SELL SHORT:
Limited Brands (LTD, $11.27) Limited Brands hit an October low of $13, then rallied in early December to just over $18. Since that time, it has been in a persistent downtrend. The stock broke through what can be read as a descending triangle in mid-January at $13 and subsequently declined to $12. In early February it tested the old support, which had become new resistance, at $13. It then failed and broke down to $11.
The stock is in a steep downtrend. It is below the 4-day moving average, which is in turn below the 9-day moving average. Both are sloping downward. On any rally attempt, LTD should face stiff resistance at $12 and extremely strong headwinds at $13. As shown by the Price Relative indicator, the shares remain very weak in relation to the general market. An attempted bounce in the stochastics indicator from an oversold level appears to have been turned back, and an attempted rally in CCI has been turned back as well. The OBV indicator is in a steep downtrend, mirroring the price pattern. I think LTD will retest or even break its 2001 low under $10, and therefore I have set my target price at $9.25. ---------------------------- BUY:
Schlumberger (SLB, $41.95) Schlumberger's October bottom was below $35. From that level a rally took the shares to just north of $45 in early December. Yet SLB then took a round trip back to just above $35. The shares bottomed in mid-January and have been recovering slowly since that time.
On Tuesday, February 18th, SLB broke through a downtrend line and a resistance level simultaneously in the $39 range. The shares are now advancing strongly and seem poised to test $45 resistance. SLB is outperforming the S&P 500. The rate of change indicator is in a strong uptrend. MACD has given a buy signal and is approaching the significant zero line. The histogram is correspondingly strengthening, but has not yet reached levels where the shares are overbought. Stochastics and CCI are overbought. However, RSI is above its uptrend line and has broken through the important 50 level. With continuing war tensions giving support to crude, I think SLB can at least test $45. Stock: Petro-Canada (PCZ, $34.67) Petro-Canada has broken out of a two-week consolidation pattern and is moving nicely toward our target of $36.50. As I stated when I recommended the stock, this one will not be a quick mover. Patience will be needed for it to reach the target. ---------------- Stock: Harrah's (HET, $33.21) Harrah's came within 20 cents of our target last week but has since rebounded. On Friday, Zack's gave this stock its most negative rating, yet HET had a strong rally. Go figure? Perhaps the shorts covered? Maybe I am being stubborn, but I don't see it taking out our stop loss, which I've set above the break of an important support level at $35. I continue to hold HET. ---------------- Stock: H&R Block (HRB,
$37.62) HRB traded down to $35.00 after we entered. It has recovered to just about our entry point. Earnings are due out on Monday, February 24th. A tight stop is in at $38.05. ---------------- Stock: Lehman Bros. (LEH, $53.85) LEH has rallied off $50 support. The stock has strong resistance between its current close and the stop we set at $55.10. If the stop does get hit though, then we will be out of the trade. 7. STOCKS TO WATCH IN THE COMING WEEK With the uncertainty created by the Iraq situation, I am watching both bullish and bearish stocks. Below are tech stocks that have been showing good relative strength. These issues should be first out of the gate when the market begins to advance. Very aggressive traders may want to play what remains of this countertrend rally, but I'd urge you to be very nimble if you choose to do so. EMC CORP. (EMC, $8.04) -- This storage sector bellwether is trying to break out above $8.30. It closed above that level this past week, but the breakout was on low volume and the shares have since pulled back. An uptrend line comes into the stock around $7.60, so it will be vital for EMC to hold this level on any pullback. CORNING (GLW, $4.99) -- GLW continues to hover around the $5.00 mark. The stock seems to be in a flag pattern. Important support is around $4.70. NEXTEL (NXTL, $12.89) -- I have described this wireless provider as the pig that lived in the brick house -- the one the wolf couldn’t blow down. The house is still standing. In a rectangle formation, the stock is holding above $12.00, with key support at $11.00. Resistance is at about $14.50. Earnings released this past week had little impact on the stock. CITRIX SYSTEMS (CTXS, $11.86) -- I had thought CTXS might be another brick house dweller, but alas it seems to reside in a mere wood-frame abode. I don't like the pattern of declining tops, so I am taking it off my watch list. ---------------- On the other side of the spectrum are stocks I want to short when I am convinced this countertrend rally has failed. I wrote about two of them last week. UNITED TECHNOLOGIES (UTX, $61.52) -- As I stated, this is a prime short candidate. I am canceling my sell on stop order and will instead try to short the stock toward the upper end of its trading range between $63 and $65. If it doesn't get that high, then I will also watch for a break from support. CLEAR CHANNEL COMMUNICATIONS (CCU, $36.77) -- I also discussed Clear Channel in last week's newsletter. There is very strong resistance between $37 and $38. Again, this is one I'd like to short when the market peaks or the stock shows signs of rolling over. I am also canceling my sell on stop order to get a better entry price. PLEASE SEND
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