Tuesday, September 30, 2008


Did you get giddy today with the rally? I’m sure you did. It was a nice strong rally, but it wasn’t enough to make up yesterday’s difference. We had to correct from an oversold level in one day. When I say oversold, I mean oversold! After yesterday’s monstrous decline, you can’t expect too many breakouts or new 52-week highs. On fact only 14 made new highs and the stocks that did jump 20-90% did so to recover about half their lost ground.

I’m not sure how long the rally will last, and maybe it was a one day corrective measure, but don’t be fooled, we’re still in major bear market territory. I would advise selling to strength on days like day. If the market fully recovered the lost 9-10% today, then that signals a major and dramatic shift in sentiment that cannot be ignored. Watch if tomorrow is a continuation day to the upside or a reversal back to the downside. The anticipation and uncertainty of the new bailout bill will put us right back into a consolidation pattern.

Here are 4 breakouts that occurred today: Extreme Networks (EXTR), Charles Schwab (SCHW), Isle of Capris Casinos (ISLE), and Huntsman (HUN).

EXTR broke out of a short-term downtrend, but remains in a neutral holding pattern. The reason why I consider EXTR as a breakout is because the stock closed cleanly above both major moving averages as well as filled and exceeded the previous gap. This stock is not a long-term investment, but more of a swing play.

SCHW is a financial that’s performing extremely well amid the volatility. If you need a stock that isn’t subjected to massive swings on large days, then pick SCHW. Not counting the faker short-selling ban gap up day, SCHW would have made a new 52-week high.

ISLE is performing extremely well and recently broke out after resting upon the 50-day MA. ISLE also cleared the important 200-day MA and is now free to head higher without much resistance for the short-term. The prior high does provide some resistance, but the breaks above the MA’s are more significant at this point.

HUN formed a breakaway gap, possibly signaling the start of a major uptrend. Hun closed $0.02 above the 50-day MA, but it wasn’t a “clean” breakthrough. I would wait several days to see if this level can be tested successfully but it is safe to say that the downtrend has ended for now.

On a day like today, there were still 288 new-lows being hit in the market compared to 14 new-highs. I still stand firm in my belief that a market cannot property rally if this ratio does not change considerably. We have 6 breakdowns for today: Gushan Environmental Energy (GU), Reliant Energy (RRI), Hartford Financial (HIG), Wendy’s/Arby’s Group (WEN), First State Bancorp (FSNM), and Google (GOOG). All of these stocks should be avoided, no matter how much you’ve fallen in love with them.

GU dropped well below its previous low and does not have any support remaining after it IPOed in late 2007. A stock like this is to be avoided because a support level must be determined by the market.

RRI joined the waterfall club today. To see if a stock joined the club, all you have to do is get a ruler out and put it vertically against the drop. If it looks like a waterfall, then it’s a card-carry member. This is not a good reason to buy any stock. The $7 support level is present in 2005, however if this breaks, the stock will go to sub-$5 quickly.

HIG broke its downward channel today and looks like it will test 2003’s low at $30. There are no major support levels in between now and then. There is no reason to buy, but this presents a good shorting opportunity once the ban is over.

WEN dropped to 1999 levels and has also joined the waterfall club on the highest volume ever. There is support at $3, however I believe WEN will consolidate for the long-term if it reaches that point.

FSNM broke its uptrend today. Surprisingly, this bank did not drop as much yesterday as the vast majority of its peers have, but got crushed today on a nice-sized rally. If a stock can’t follow a day like today, it’s a sell. $4, or the previous low, is the major support level which goes back to 1996. The stock is near its IPO price back in 1993.

GOOG formed a descending triangle and broke through $410 support. The next level to watch out for is $310. I would highly avoid GOOG, even if you two share the same bed. GOOG is in its early stages of the decline and sure, many people are loving GOOG still, but the chart does not lie. Avoid it if you can.

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