Staples Punches Through Downtrend
The market Tuesday ratified positive
news from office products retailer Staples. Shares blew above a major downtrend
line on hefty volume. Not enough to trigger a buy signal for in the
intermediate-term momentum trade but enough to put the stock on your radar.
The Wall Street Journal reported that
Staples
(
SPLS |
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PowerRating) expects it will top second-quarter profit estimates by a
penny. The company’s CEO told the newspaper that same-store sales should
increase 10%, and that Staples would fatten its bottom line by 30% in the next
fiscal year.
The stock shot up 2 1/4 to 17 9/16 on
four times its usual trade. As you can see, Staples shares cleared their 50-day
moving average and a major downtrend line started at the stock’s Feb. 11 high of
28 11/16.
As an intermediate-term momentum
trader, I insist that stocks that have corrected make up at least half of their
losses off the highs before considering them for possible long entries. First, a
deeply corrected stock needs that performance in order to raise its relative
strength scores sufficiently to make it a momentum play. The second concern is
overhead supply.
Overhead supply is the amount of shares in
the hands of shareholders with paper losses. Wall Street calls these buyers weak
holders because they tend to look for exits and sell into rallies, blunting
further share-price progress. You can find a stock’s mid level by
summing the pre-correction high and the post-correction low, then dividing the
result by 2. Staples’ mid level lies at 20 15/16.
After Tuesday’s close, Cisco Systems
(
CSCO |
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Chart |
News |
PowerRating)
reported earnings of 11 cents a share in the July 29 fourth quarter, up from 8
cents a year ago. Excluding one-time charges, the networking giant earned 16
cents, a penny above estimates, according to First Call/Thomson Financial. Sales
surged 61% to $5.7 billion.
The stock’s mid level is at 66. The
stock can easily gap ahead of traders in tomorrow’s session. The key is to allow
Cisco to make and digest its advance, then form a handle on thin trade. Then
wait for the breakout on heavy volume. You’ve got two resistance points at 71
7/8 (see Point A in chart) and 69 3/4 (Point
B).
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All stocks, of course, are risky. With
any new position, be sure to set a stop where you will sell your new buy or
cover your short to cap your losses. Also, limit your position size to a
manageable percentage of your account value to provide further protection in the
event a stock moves past your stop before you can act.