Wednesday, July 18, 2007
by David Yu
I'll set up a new spreadsheet, like I did last year, to track my new trades soon. I'm glad to hear that many of you have made good money following my trades. By the way, I hope all of you continue to hold the Euro Currency Trust (FXE) that I recommended last year in your portfolio.
In any case, the party atmosphere on Wall Street surrounding the Dow Jones Industrial Averages (DJIA) reaching 14,000 hasn't done anything to change my current bearish bias. The same group of people cheering now are those who disputed the legitimacy of the DJIA as a valid indicator of the stock market before. I remember their vigorous arguments just about a year or 2 ago when the market appeared to be going nowhere.
Oh well... Here's looking at the biggest home improvement retailer.
Both the Current Market Conditions and the Future Expectations of The Remodeling Market Index (RMI) by NAHB have been in a long-term downtrend since the 1st quarter of 2004 (see Chart 1). In addition, the NAHB/Wells Fargo Housing Market Index (Chart 2), which gauges home builders' confidence, had just dropped to 24 in July - its lowest point since January 1991.
Chart 1
Chart 2
That and everything else that had already been discussed about the grim outlook of the remodeling and building industries should spare us the trouble of delving into more of the fundamentals. Let's go straight to the technical analysis.
This 30-minute 20-day intraday chart (Chart 3) looks like a battleground. The surge above the $40.14 resistance (the peak between the 2 troughs - blue circle) completed the Double-Bottom bullish reversal on 7/6/2007. This $40.14 resistance then became the support (red dotted horizontal line). We can see this support had been tested numerous times since the breakout (blue arrows). And, it withstood the test till yesterday. Yesterday, the intraday low of $40.10 broke below this support. This morning, it descended further to $39.96.
The gradual erosion of this support is further evident by the declining RSI in the upper pane of the chart and this stock's inability to reach its Double-Bottom Bullish Reversal price target. After the resistance break-out, the price target was supposedly in the range of $41.33 - $41.47; it had only reached as high as $41.01 on 7/13/2007.
Chart 3
I was able to scoop up some August $37.50 put option contracts at $0.20 yesterday.
Good hunting!
David Yu