Technical Analysis

Support and Resistance

July 17, 2007 by Chris 4 Comments

Stock of the Day – Update
Rochester Medical (ROCM)
Monday’s Closing Price: ROCM – $14.75

Potential Trade Set-up:
Ideal Entry: NOW (currently $14.75)
Risk is set at 1.0% maximum of total portfolio or $1,000 of $100k
Stop Loss is 5% or $14.01
Number of Shares: 1,356
Position Size is $20,000
Risk is $0.74
Target is $21
Risk-to-Reward is 8-to-1

I am providing this potential trade update with the latest trade setup that allows the previous gap-up to be considered (pointed out by a reader: dankkir, “nobody here mentions the gap at 14.19 which needs to get closed before any long term upside…its just another 5% away“). The entire trade has the potential to fall apart if the overall market starts to tank so be ready to cut losses. However, don’t anticipate anything; follow your rules and the trade parameters.

Take a long look at the support and resistance line on the point and figure chart provided. It tells me that the stock is going to blast higher for a triple top breakout or get slammed lower for triple bottom breakdown.

Too bad we can’t play options here (not offered) because I would trade a move and wouldn’t care what direction it went in, as long as it moved. As Taylor says: “Looks like it’s about to fall off a cliff to me.” If that were the case, a straddle would work.

I would create a straddle – remember; I am not a great option’s trader so don’t listen to what I am saying as I am still learning (please chime in if you see a better strategy using options if they were available in this case)!

Long Straddles (definition from optionsXpress):
Have you ever had the feeling that a stock was about to make a big move, but you weren’t sure which way? For stockholders, this is exactly the kind of scenario that creates ulcers. For option traders, these feelings in the stomach are the butterflies of opportunity. By simultaneously buying the same number of puts and calls at the current stock price, option traders can capitalize on large moves in either direction.

Here’s how this works. Let’s imagine a stock is trading around $80 per share. To prepare for a big move in either direction, you would buy both the 80 calls and the 80 puts. If the stock drops to $50 by expiration, the puts will be worth $30 and the calls will be worth $0. If the stock gaps up to $110, the calls will be worth $30 and the puts will be worth $0.

The greatest risk in this case is that the stock remains at $80 where both options expire worthless.

Filed Under: Point and Figure, Stocks, Technical Analysis

Rochester Medical (ROCM)

July 10, 2007 by Chris 13 Comments

Stock of the Day
Rochester Medical (ROCM)
Monday’s Closing Price: ROCM – $15.28

Sector: Health Care
Industry: Health Care Supplies
52-week Price: $6.85 – $29.76

The company develops, manufactures and markets a line of latex-free and PVC-free urinary continence and urine drainage care products. Eight of the past eleven quarters have reported higher earnings than the same period from the previous year.

The stock is not covered by many analysts and is thinly owned by institutional investors as you can see below. Add this to a small float and we have a stock that can pop at any time just as it did earlier this year. Based on the trade setup I presented yesterday, I have decided to develop two daily charts that explain the potential price targets in greater detail. The first chart shows a target zone based on the gap-down area from late April and early May. Can the stock trend higher and fill this gap? If so, we have a nice 50% gain on capital invested and a solid cash increase based on risk (potential 7R trade).

The second chart overlays Fibonacci retracements and shows an identical target zone based on the 38.2% and 50% retracement levels. None of this is an exact science but it gives us an educated guess as to where the stock could move if it starts to trend or even pop. The stock is trading between the 50-d and 200-d moving averages and looks to be trading sideways in a suspicious manner. I have no idea what is going on after the huge run-up and breakdown earlier this year but I like the risk-to-reward setup. This is what I wrote yesterday when I first screened the stock:

Late Buy Opportunities:
“Rochester Medical (ROCM) has had one heck of a year as it blasted higher from $7.50 to as high as $29 in six months of time. Since the peak, the stock has corrected by 50% over the past two months and is now trading with a suspicious quietness above the 200-d moving average. Is there some type of news that will be released that will propel this stock higher? I don’t know but the trade setup is ideal so take it. Something may be going on behind the scenes so take the nice risk-to-reward setup.”

Institutional Analysis:
Held by Institutions: 21%
Money Market: 40
Mutual Fund: 15
Other: 1

New Positions: 27
Positions Sold: 2
Shares Held: 2.7 mil
Shares Held Previous Period: 2.1 mil

Shares Bought: 1.5 mil
Shares Sold: 0.9 mil
Value of Shares Bought: $22.7 mil
Value of Shares Sold: 14.1 mil

Top Institutional holders, Shares Held:
Oberweis Asset Management Inc., 413,650 shares
Dimensional Fund Advisors Inc., 281,774 shares
Allianz Global Investors of America L.P., 200,000 shares
The Vanguard Group, Inc., 166,467 shares
Bridgeway Capital Management, Inc., 152,800 shares

[Read more…]

Filed Under: Stocks, Technical Analysis

NASDAQ Stocks show Moving Average Divergence

July 2, 2007 by Chris 5 Comments

Another secondary indicator is pointing to an exhausted market that is due for a correction or pullback but please understand that this is only a secondary indicator.

Looking at the two charts below, we can see that percentage of stocks trading above their 50-day and 200-day moving averages has been slipping as the NASDAQ moves higher. This action concerns me along with other data that suggests the market is heading for a correction or consolidation. I understand that the trend is still higher and I am still long several positions in my own personal portfolio so I haven’t jumped the gun on selling based on any secondary indicator but I am on alert.

Let’s study the first chart for a second:
The percentage of NASDAQ stocks trading above their 50-day moving average

As you can see, the number of stocks above this level reached a peak of 67.81% in October of 2006 as the NASDAQ was trading near 2,300. Since then, the number of stocks trading above this level has gradually decreased from 67% to 46%. The NASDAQ has gone from 2,300 in October to 2,600 in recent weeks yet the number of stocks above their 50-d moving average has slipped by 31% (market gained 13%). I will ignore the volatile swing from February of this year and concentrate on the overall monthly trend.

The number of stocks slipping below their 50-day moving average since April 2007 has gone from 59% to 46% while the NASDAQ has gone from 2,500 to 2,600. Anyone can see the divergence that has occurred over the past three months and certainly over the past eight months. It is not normal for the NASDAQ to move higher without a strong underlying support system.

What does this tell me?

It tells me that the weaker stocks are starting to drop below their 50-day moving average support level which indicates that the market leaders and general market may soon follow. Market leaders generally slip below their support levels after the weakest stocks have already pulled back. Leaders tend to drop last and blast off first.

Let’s look at the next chart:
The percentage of NASDAQ stocks trading above their 200-day moving average

Here we see a chart that is similar to the one above over the past three months but slightly different when going back to last year. It concerns me even further that the number of stocks above this longer term moving average support line has been dropping quickly over the past two months while the NASDAQ pushes higher.

The percentage of stocks above this line has gone from 57% in early April to 48% on Friday (a 15% drop). However, the NASDAQ has gone from 2,500 to 2,600 over the same period of time.

I can’t honestly sit here and say that the market is going to correct in two days, two weeks or two months but I also can’t ignore such red flags that continually appear on secondary indicator charts. I will continue to hold my positions until the primary indicator of price and volume confirms but I will be watching closely!

*FYI: The price of the NASDAQ is in the shaded gray area of each chart if you weren’t aware.

Filed Under: General Market, Technical Analysis

Point and Figure Exercise – HANS

June 22, 2007 by Chris 8 Comments

Point and figure charts are one of the great tools many technical traders overlook. I have followed them since I was 15 years old due to my father’s love for the technique. He would plot hundreds of charts each year by hand in a graph book prior to computers in the 1970’s and 1980’s. He taught me about the charts and the key support and resistance areas to look for when scanning for opportunities. I found this old case study I did in 2005 and thought it would serve as a perfect example of the power of point and figure charts.

The chart was sounding a buy on 5/4/05 even though the stock had already moved from $20 to $60. Would you have bough? I did as did many MSW members that e-mailed me. See the updated chart below to see what HANS went on to accomplish.

For today’s exercise, please understand that I didn’t highlight every single breakout on the P&F as that would have cluttered the Hansen Natural (HANS) chart. However, I did highlight the obvious, stronger breakouts that were confirming this stock’s strength time and time again. No one should have missed HANS in 2004 and 2005 if you were trading this chart along with basic price and volume.

Follow along with the legend below and start to learn about the world of point and figure charts. I bet you won’t stop using them once you learn the benefits and accuracy that they can add to your more traditional technical analysis tools.

Please note that this chart was originally featured as a case study for MSW back in May 2005 when HANS was trading at $64.09 (pre-splits).

Stock of the Day Updates

June 18, 2007 by Chris 2 Comments

I am going to start the week by highlighting the charts of several “stock of the day” candidates I have covered in 2007. MasterCard is quickly becoming the current master in my portfolio and one of the top performers on the blog this year. Quietly, Burger King has given investors a 24% gain since I covered it back in February while matching it up against JADE (covered by WallStrip last week).