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All,
Another down week and hopefully the last for a while <G>. I was
stopped out of SCH and SORC which left me over 80% cash with stock
positions in only BAR and TRV and LEAP calls on CPQ. The reason I say
"hopefully the last", is that I think we had our blow-off correction
bottom Wednesday when we had a high volume day with the DDI being down
almost 200 points during the day to touch the bottom of its Long Term
Up Trend Channel (LTUTC) only to recover and close up a little for the
day. It then had high volume days Thursday and Friday, although not
quite as high, with the Average up again Thursday and up strong Friday
during the day and then holding on to close up a little. To me, that
looks like a typical blow-off bottom pattern. Also, the rest of the
indices I follow show similar patterns near or on the bottom of
intermediate or long term up trends. Also, the overall market is over
sold with almost 70% of all stocks at or under their 200 day moving
averages. The small cap stocks are down almost 30% for the year.
It's really only the large cap. market leaders that have been strong
this year.
That means that my new positions should still be long. The real
question is should I stick with the market leaders or is it time to go
with the small caps. The answer is that I don't know <G>. Therefore,
I'll compromise and split my new positions between large cap momentum
plays and small cap value plays. Then I can weight my portfolio one
way or the other later. The internet group has been hot all year but
corrected back to the bottom of their Intermediate Term Up Trend
Channel (ITUTC) during the last month. This group also looks like it
completed its correction Wednesday. The chip stock group has been
weak for a long time, but showed signs of life during the last month.
This week's picks from those groups are America On Line (AOL) and
Smart Modular Products (SMOD).
AOL at 111.875 is in a long and intermediate up trend and just
broke out of a Short Term Down Trend Channel (STDTC). The top of the
ITUTC is at 150 and the bottom is at 97. It hit an all time high of
140 1/2 on 7/21/98 and then pulled back to the bottom of the ITUTC
during the day Wednesday. From their it started back up and broke out
of it's STDTC on good volume Friday. The indicators support my theory
that a short term trend change is in progress. This is a pure
momentum play on an internet stock so, as expected, the Price/Sales is
extremely high at 10.94. The rest of the fundamentals look good with
Debt/Equity of 0.84, 27% insider ownership, actual earnings this year,
and five year average annual growth of over 100% and this years
revenue growth still over 50%. I'll set the target just under the top
of the ITUTC at 149. I'll set the initial stop just under the bottom
of the ITUTC at 96 3/4. Once there is enough data for a good Short
Term Up trend Channel (STUTC), I'll move the stop up to under it.
SMOD at 18 1/4 just broke out of a year long down trend. It
peaked at 44.56 on 10/8/97 and then went into a free fall all the way
back to a low of 12.06 on 7/14/98. From there it rose to break out of
its Intermediate Term Down Trend Channel (ITDTC) a week ago Thursday,
then it pulled back under the channel again to a low of 15 3/8 on
Wednesday before rising above the ITDTC again on Friday. The
fundamentals are great, as they should be for a value play, with a
price/sales of 1.04, No debt, 53% insider ownership, and annual
revenue and earnings growth both over 70%. I'll set my target at 44,
just under the 97 high. There isn't enough data for a STUTC yet, but
there is a lot of resistance just over 15 so I'll set my initial stop
under it at 14 3/4 and keep it there until there is enough data for a
good STUTC.
Jim
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