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The
Bulls' First Real Challenge - The Breakdown Begins |
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We've
got a handful of things to look at today, so no big fanfare - just a
quick overview.
First up is
a look at the broad market. Today's dip (so far) is the first serious
bump in the road the bulls have seen since March's low. This is the point
when we'll really find out if the last eight weeks were indeed only
a bear market rally, or the beginning of a new bull market.
More below.
Following that,
we've got several micro cap stocks and penny stocks for you to think
about. Some of them are really starting to move, while others are
stocks that for one reason or another caught our attention, but may not
be trade-worthy yet.
Not that there
hasn't been the occasional stumble for stocks since March 10th, but none
of them lasted for more than two days. If today's selloff holds its place,
we'll
have taken our third consecutive daily loss; some key support lines
have already been broken.
The nearby chart
of the Russell 2000 explains it all.
 The
blue moving average line is a 20 day moving average, which almost stopped
the March rebound before it got started. Then once it did get started,
the 20 day moving average line served as the rally's first springboard.
The same 20 day line also revived the rally when things got a little shaky
in mid-April. In other words, it's important.
As you can see,
the 20 day line did NOT hold up as support today; it was at 485, and the
Russell 2000 has hit a low of 479.88. Strike one.
At the same
time, today's dip carried the Russell 2000 under straight-line support
(orange), which was 'the' line throughout the entire bullish phase.
So now what?
Well, the day
isn't over yet - things can always change. However, we feel we have
to take this chart at face value until we have a clear reason not to.
There are a
few potential landing spots for the Russell 2000, but none more meaningful
than 448. That's where you'll find a confluence of significant support
levels, including a 38.2% Fibonacci retracement line, the 50 day average
(purple), and the 100 day average (gray).
All told, a
move from Russell 2000's recent peak of 511.82 to 448 would mean a 12.4%
slide from the high.... a healthy but tolerable correction within a new
bull market if that's what this is (and as we think it is).
If for some
reason the 448 area does not hold up as support, then the next checkpoint
is the 61.8% Fibonacci retracement line at 408. You should be thinking
defensively before things get to that point though.
Even though
the market is positioning itself for a decent pullback, we're still
finding a lot of potential trades on both sides of the fence (a lot
more than we were finding just a few weeks ago anyway). Here are five
- four bullish and one bearish - you may want to look at today. No guarantees...just
ideas. Keep in mind the environment though. A nasty bearish move can punish
even the best of rising stocks.
** Bullish
**
 HKN
Inc. (HKN) - Though it's very overbought in the short run, the last
month has been spectacular for this little oil and gas explorer.
Part of the
reason for the stock's boost was likely to be some help in the form of
rising oil prices, though as a recent news release said, the company also
managed to generate a positive cash flow last quarter prior to crude
oil's rebound. On the flip side, weaker demand for oil really crimped the
company's 2008 revenue.
Now that the
company has figured out how to turn an operating profit though, perhaps
higher oil prices and the demand fostered by an economic recovery will
be a winning formula. Just be careful of short-term volatility after the
recent pop.
Allied Defense
Group Inc. (ADG) - Strictly a momentum/pattern play. After brushing
new lows under $3.75 last month, Allied repeated a pattern that's been
in place for a while. The upper end of the range - and likely topping
point - is either $7.00 or $8.00. Both have been resistance levels
since August of last year.
 Flow
International Corp. (FLOW) - This chart's rebound effort has been healthier
and better-paced than most, meaning it's more likely to be sustainable.
The break above resistance around the $1.90 area only happened this week,
and it took about three months to materialize. There's another hurdle around
$2.50, though FLOW's got some momentum to work with now.
The most compelling
aspect of this chart is that shares were trading above $10.00 last May;
now they're under $2.00. That's a lot of recovery room.
Flow International,
which manufactures high-pressure water pumps, posted a loss last quarter...
the first in a while. However, the worst may be in the past, as new distributors
have been added and nagging litigation has been settled since then (the
settlement was the reason for the loss). Analysts expect a return to profitability
next quarter, as well as next year.
Dolphin Digital
Media Inc. (DPDM) - Another momentum play, though this one caught our
attention because of the massive increase in buying volume since late March.
The stock's only been mediocre, but with that many buyers, something's
got to give soon.
Just for the
record, Dolphin's pace of meaningful corporate activity has really been
ramping up in 2008. All the overhauls haven't helped the bottom line yet,
but the top line has been improving over time. That's the likely reason
for all the buying.
 **
Bearish **
Mirani Brands
Inc. (MRIB) - Mirani shares made a breakout effort starting on May
4th. Volume spiked, and the stock rallied a little.
However, after
three days of strength the 20 day moving average halted the rally, and
the bears took over again at that point.
One of the few
things more bearish than a chart that's already falling is a chart that's
falling after a failed breakout attempt. All those buyers got in, but
they could all scurry out again in a hurry if MRIB falls too far under
their entry price.
The rest of
these stocks are micro caps and penny stocks 'of interest' but for whatever
reason don't seem quite as compelling. Some are bullish, and some are bearish.
Some are range-bound and itching for a breakout or breakdown. Many of them
exhibited some really peculiar volume recently as well.... a red flag.
We may or may
not follow up with any of them in the future, but they may be worth a look
from your end if you're looking for some ideas.
-
Richardson Electronics
Ltd. (RELL)
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Anpath Group Inc.
(ANPG)
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Centerline Holdings
Co. (CLNH)
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Endevco Inc. (EDVC)
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Legend International
Holdings Inc. (LGDI)
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Sentry Petroleum
Ltd. (SPLM)
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Converted Organics
Inc. (COIN)
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U.S. Gold Corp.
(UXG)
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ParkerVision Inc.
(PRKR)
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Gabelli Healthcare
& Wellness (GRX)
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
