K (Friday's closing price - 45.09)
K has not had a retest of the 5-year lows made in March at 35.64, or a good correction from the $10 rally seen over the last 14 weeks. In addition, the stock has reached a level that shows a clearly defined weekly close resistance. If the indexes are starting to correct, it is highly likely the stock will correct as well.
On a weekly closing basis, resistance is strong at 45.05, not only from a previous high weekly close of consequence, but also psychologically. In addition, the 50-week MA is currently at 45.98, giving that area added resistance of consequence. On a daily closing basis, resistance is strong between 45.09 and 45.24. On a weekly closing basis, support is minor at 43.25 and decent to strong at 42.30. Strong psychological support will be found at $40. On a daily closing basis, support is minor at the 200-day MA at 44.50, and decent between 42,65 and 43.45. Below that, support is found at 40.69.
K is in a strong up-trend that started when the stock gapped up on Apr 30th from 39.92 to 40.29. In addition, the stock gapped up last Wednesday from 43.70 to 43.80 and broke above the 200-day MA on Thursday, giving the chart the possibility of a breakaway and runaway gap formation, as well as the beginning of a new spike up. Nonetheless, the intra-day resistance between 45.69 and 45.94 (45.05 on a weekly closing basis, and 45.24 on a daily closing basis) must be considered major at this time. If the indexes are correcting and the stock is unable to follow through on all these positives, disappointment would be felt that could generate a strong move down.
Support is strong at the gap area between 39.92 and 40.29. If the stock closes the gap at 43.70, the probabilities will increase strongly of a down move.
K does not offer a high probability trade but the risk factor is small and clearly defined.
Sales of K between Friday's closing price of 45.05 and up to 45.56 and using a stop loss at 46.04 and having an objective of 40.29, will offer a risk/reward ratio of 5-1.
My rating on the trade is a 2.75 (on a scale of 1-5 with 5 being the highest probability).
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I added shorts here at 45.90. Stop loss is at 46.04 but it is mental. I am now averaged short at 45.40 with 3 mentions.
Previous high in K was 45.94. Stock has been up to 45.92 today.
If you have not sold K up to now, you cannot find a better risk/reward ratio as the stop would be at 46.04. The stop should be mental, as they might go for the stops and then sell it off. Nonetheless, this is the intra-day resistance in which my sale mentioned was based on.
I doubled up on my short positions with a sale today at 45.42. I am now averaged short at 45.15. Stop loss continues to be 46.04.
As I mentioned before, this is not a high probability trade because the stock is in a major up-trend.
Nonetheless, the resistance up at these levels is very strong and the indexes are correcting, which means the stock will not get help from that area.
If the rally is not able to continue this week, the bulls will start liquidating as they will realize they are not going to be successful in getting above the resistance. If that happens, the stock will start heading lower, and that could begin to catch downside momentum as the stock is very overbought.
Let me explain something about what is probably happening to K at this moment. I did somewhat cover it in the newsletter, but it bears explaining it further.
The stock presently is in a very bullish mode that promised further upside today, prior to the indexes opening lower and showing this weekness.
Keep in mind that when the stock got above the 200-day MA, gapped up from 43.70 last week (breakaway/runaway gap) and closed near its highs on Friday, the bulls had it all going their way and had the momentum going to break through this very strong resistance level.
Certainly the drop today in the indexes is becoming a monkey wrench, but with all the positives that exist in the stock, the bulls are not pulling their purchases and the stock is not falling..............just not going up.
The mentality, though, will begin to change if the momentum to the upside is truncated as the bulls committed themselves to further upside. Nonetheless, it is not likely that for the first couple of days of this week the stock will fall, as the bulls will keep the stock up near these levels hoping that something changes. It is important to note, though, that momentum is something that needs to be fed or it starves, and therefore if the stock is unable to accomplish what it set out to do on Friday, disappointment will start to set in, though it is not likely it will happen over a period of one or two days.
The first thing that needs to happen is another close today below 45.24, and hopefully in the red below 45.09. If that happens, the stock will likely go down a bit more tomorrow to the 44.47 level where the 200-day MA is currently located, and close there. That line will probably be a strong pivot point for the stock this week. Depending on what the indexes do the rest of the week, the stock will then decide what to do at that moment. If the indexes recover from today's drop (unlikely), then K will likely retry the upside.
Nonetheless, if the indexes don't recover, the stock will likely try the 43.70 gap and if that is closed, it could be a strong catalyst for more downside.
This whole process will take all week to occur, with the probabilities still favoring the bulls. Nonetheless, if the indexes are not able to rally, K should start giving negative signals by the end of the week, and next week would be the drop.
This is a trade with a low probability rating, but with such a clearly defined resistance level that it just had to be made. Even if it works, don't expect much from the stock (just hopefully minor signs) this week.
Per my newsletter mention I sold K today at 44.88. Stop loss is at 46.04 and objective is 40.29. I am risking $116 to pick up $459 per 100 shares. It is a 4-1 risk/reward ratio.
It is going to be interesting to see if K can go against the indexes (doubtful). The DOW has broken an inverted head & shoulders formation that shows an objective of 8196. In addition, this morning the Central Bank stated that the recession is likely to be longer than anticipated and everyone seems to be scrambling to sell, as for the last 15 weeks everyone has bought. Lots of profit taking coming in today.
It is likely that the indexes are now in that corrective phase that had to happen at some time. How that will affect K, it will be interesting to see. K has been in a strong up-trend but it at strong resistance here. If they cannot generate a rally and the stock closes in the red today, that could be a signal that the breakout above the 200-day MA is failing. A close of the gap down at 43.70 should be the clincher.