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WEEKLY CHARTS

Last week, the negative divergences that had dominated the technical signature of the price action for almost four weeks, finally won out and the indices finished with losses ranging between 2%--as was the case with the SP--and 3%--as was the case with NASDAQ. Moreover, all the technical indicators confirmed the decline by making lower lows, implying that the odds are better than even in favor of some additional price weakness. The real question now is whether last week's "break" signifies the end of the rally that started back in late April, or is just a sharp pullback within an ongoing bull move.

We can get some important clues by closely examining the chart pattern for NASDAQ. Notice that so far the pattern of the advance off the April lows has shown a remarkable resemblance to the pattern of the advance off the August '04 lows. Moreover, eight weeks into that rally--the week of 10-14-04--we had a 45 point decline in NASDAQ, a 27 point decline in the SP, and a 230 point decline in the Dow, very closely resembling last week's declines, which also happened to be the eighth week since the beginning of the rally in late April!

If the rally off the April lows is similar in duration and magnitude to the rally off the August '04 lows, then NASDAQ ought not to close below 2000 anytime during the next two weeks, and that would be the worst case scenario. In fact, it shouldn't even close below 2025. So, if NASDAQ manages to hold above 2000-2025 and reverses to the upside, then the odds will favor the bullish case, and a subsequent close above 2100 would provide the confirmation.

On the other hand, if sometime during the next 10 trading days we get a close below 2000, then the odds will favor the bearish case, implying that the rally has failed and we ought to be looking for a further decline to the 1925-1900 zone.

Moreover, the action by the Quantifier and the McClellan Oscillator will give us the opportunity to further confirm the clues that we will get from price. The Oscillator is near the -25 level, and the Quantifier is near the -10 level. These are the levels that usually act as the "first line of defense" after the zero line has been penetrated.  Consequently, over the next 1-2 trading days it highly possible that we will see a bounce. How the Quantifier, the Oscillator, and price behave during the bounce, if it indeed takes place, will allow us to determine with a reasonable degree of certainty whether the weakness of the past few days represents the beginning of an intermediate term decline, or, it is just a short-term sharp pullback within an ongoing intermediate term advance. For the next 1-2 trading days, just observe the action while staying in cash. There is no need to do anything else.

TRADING  IDEAS: I have received many emails from readers asking me to discuss some of my specific trades. I am always reluctant to do so because I have no idea if my trades are appropriate and suitable for everyone who reads my articles, and I certainly do not want any of you to construe them as "recommendations." They are not, and they come with a warning.

WARNING! The following ideas are trading suggestions in which I believe many of you may be interested in, judging from the high number of emails that I get from you each week. These ideas reflect my sincere opinions, which could turn out to be wrong. They are not intended to be personalized recommendations to buy, hold, or sell securities. Investments in the securities markets, and especially in options, are speculative and involve substantial risk. I do not know if any of these trading ideas are appropriate and suitable for each individual investor. They are probably not. I strongly discourage you from implementing any of these trades without determining whether they are appropriate and suitable for your investment goals, as set by you and/or your broker, or R.I.A.

APPX: Short at the limit price of 40.75, with a stop at 42, add to the position on a close below 39.50.

KOMG: Short on a print below 27 with a buy stop at 28; cover and switch to long if support holds at 24.

KYPH: Long at the limit price of 33 with a stop at 31.

Company: Nastech Pharm. -Stock Symbol:  NSTK
Suggested Trade: Long: Sep. 12.50 calls/Long: July 15 puts

Comments: NSTK broke above resistance at 12.50, and that gives us two upside targets; one at 16.5, and  another one at 19.90. If it is going to rally even up to the first target, it ought to do it within the next two-three weeks. Thus, we want to be long NSTK, however, we need to keep in mind that this is a rather temperamental stock that trades quite thinly. Consequently, we also want to have some downside protection.

Trading Strategy: We will buy to open 10 of the Sept. 12.5 calls (symbol: QUHIV), and we will buy to open 10 of the July 15 puts (symbol: QUHSC).

P/L Analysis Powered By OptionVue

Company: Lexmark Int'l.-Stock Symbol:  LXK
Suggested Trade: Long: August 70 puts

Comments: LXK appears ready to embark on another leg to the downside, which would give us several downside targets from 65 all the way down to 58. Therefore, we want to have a bearish position on the stock via the purchase of puts.

Trading Strategy: We will buy to open 5 of the Sept. 70 puts (symbol: LXKTN) and we will use a close above 67.5 by the stock as our trigger point for a "loss stop" exit.

P/L Analysis Powered By OptionVue:

Company: St. Jude Medical-Stock Symbol: STJ
Suggested Trade: Long: July 40 calls

Comments: STJ has formed an "inverted head and shoulders" pattern, and on Friday it broke above the neckline setting up an upside target of 47.5-48, which ought to be reached within the next 10-15 trading days. Therefore, we want to be long the stock via the purchase of calls.

Trading Strategy: We will buy to open 10 of the July 40 calls (symbol: STJGH) and we will use a close below 40 by the stock as our trigger point for a "loss stop" exit.

P/L Analysis Powered By OptionVue

Company: Zebra Tech-Stock Symbol: ZBRA
Suggested Trade: Long: Aug. 45 puts

Comments: ZBRA has been in a well defined declining channel for the last 11 months. On Friday it reached channel resistance and it reversed violently to the downside. The first downside target is at 43, the second is at 40, and the third one is at 30. Thus, we want to be short the stock via the purchase of puts.

Trading Strategy: We will buy to open 10 of the Aug. 45 puts (symbol: ZBQTI) and we will use a close above 46.5 by the stock as our trigger point for a "loss stop" exit.

P/L Analysis Powered By OptionVue

Good trading to all.

Ike Iossif

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