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Begin Part 2 of 2

SUBSCRIBER QUESTONS

Q: In the last couple of issues you have pointed out stocks that you refer to as "topping". Can you please explain this and the criteria that you use to identify them? Should this be a signal to sell or not? Thanks much!

A: Good question. Topping characteristics come in different forms. One is after a strong move higher when the stock has doubled or more, the stock starts to show high volatility in the form of larger intraday moves up and down than normal, the moves coming one in rapid succession: one up, one down, etc. Volume usually swings wildly as well. This is a topping sign after a stock has made a strong move.

On longer term moves you also watch for another sign: the high followed by a second attempt at a high that occurs on very low volume. That shows there are no buyers in on this subsequent try, and it could lead to a double top. After either of these scenarios, it is not a bad idea to take some money off of the table. Then you watch for the breach of the trendline it has been riding higher. That is a sign to exit.

Shorter term there are signals that a bounce off of a trendline or breakout is losing steam. The stock has made a nice move, but starts running out of gas. These signals include a high-volume reversal off of the session high and a close well off of the high. Often this is accompanied by a doji. If the stock gaps higher the next session and then starts to sell off after that, the stock is usually selling off short term. Another is a low volume assent that shows the same action in closing well off of the session high; lack of volume means the move had no punch, and it will eventually fall. Gaps higher followed by selling after a good run higher are called 'exhaustion gaps.' The last flood of buyers who 'have to get in' jump in and gap the price higher; the institutions are selling to the buyers as fast as they can. Volume shoots up. The stock then usually tanks.

TEAM TRADES

RMD: A Stock Split stock that has been in a strong pattern, a saucer with handle, RMD gave us the move we were looking for soon after the market opened today. This was kind of a no brainer play from the standpoint of taking positions: the stock is in a leading sector, it is in a good pattern, the breakout point was clear, and early volume was solid. It was a matter of seeing the breakout and jumping on board. We were able to get in shortly after the breakout point (58.91) was hit with a simple limit order on the purchase of stock. We could have got fancy and waited for a test, and indeed the stock ran up to 60.50 before coming back to test lower at 59.50 before it started back up. If you missed the earlier move, that was a chance to get in. This was a good pattern, it made the move, so we were in as fast as we saw the break. Great volume and finished at the high. A very nice breakout.

THE PLAYS:

Reading the Plays: Please note that when we reference the 10, 18, and 50 day moving averages (MVA), those are exponential moving averages (EMA). The 200 day moving average is always simple (SMA). We will note when we reference a particular MVA differently, e.g., a simple 50 day MVA. Please click on the Yahoo and chart links for company and charting information.

New note for reading plays: A "prior high" refers to the high at the start of a base.

BEST PLAYS: TIER made a strong move, continuing its breakout today! It can continue higher on the momentum but only aggressive players are chasing it from here. IMCL gave us almost three points on its three-day move up from support. It is ready to complete the cup and can continue to the June high at 56.30, but volume began to recede just a bit so it can begin to form a handle here. MCHP looked great, moving up and tapping resistance on the high of 36.74 before closing on the day. Volume was higher on the solid move.

From Saturday's report:
QQQ: Didn't budge but a nickel higher; volume was lower as the index held under resistance at the 18 day MVA (which stopped it the last time the index hit it).
APA: A small move up and still looks ready to roll back up, but volume was lower-what a plague that was today for many stocks.
AZO: Lower volume, too, but still well above average; the stock lost a few pennies, showing a tight doji.
TIER: Continued a strong breakout.
BRCM: Holding with a doji as low volume held back the upside move.
NFB: Dropped further as expected, but bounced back from the low of 28.59.

Other previous plays: Got stopped out of RI and RESP today.
ABS: Pulled back on decreasing volume. Support at 35.
RESP, RI: Stopped out of these plays as they fell hard.
AVL: Still looks good in the ascending wedge.
IXX: Tapped 20.25 for the second day but can't break it despite heavier volume again Monday. Showing 2 consecutive and is still above support, so we will see what it does from here. The 18 day MVA is at 19.16; 50 day MVA at 18.54.
NMTC: Topping action today; a doji on higher volume after Friday's good move.
BLL: Headed out and gained over a point, but volume dropped back below average. PMCS: Pulling back on lower volume; support at 33.
WEN: Tapping near support (28) as volume falls.
K: Bounced from the doji, but volume was below average. It is getting ready to make a move back up, but may need to settle down a bit more first.
MME: Looks ready to move to a new high.
RAIL: Crossed below the 50 day MVA on stronger volume; watch positions here.

Indexes: The OEX pulled back from resistance as volume fell back again and is still below average. Support is at 600. The DJX showed the same action, just in a different position. It met resistance at its 50 day MVA and fell back on lower volume to close above its 18 day MVA.

Best Plays:
1) ITRI: Breaking out of an ascending wedge.
2) MCK: Squeezing into the tail of its pennant.
3) ACTN: Another breakout.
4) TTWO: Can run into earnings out Wednesday.

New:

ITRI (Itron--$20.82; +0.82; no options): Scientific & Technical Instruments
http://biz.yahoo.com/p/i/itri.html
STATUS: Broke out from an ascending wedge pattern that formed after the stock ran to a July high (21.75) then bounced off a test of the 50 day MVA (currently at 18). The buy point in the pattern was 20.38, so the stock is still within our 5% limit for buying on a breakout, but it is close. On the strong volume shown today positions can still be taken (691,100; avg. 212,000), because momentum looks strong. ITRI shows super money flow and buying. Target: 25-26
BUY POINT: 21.25, on continued strong volume. Remains a buy on the breakout up to 21.40. Stop: 19.40 (just below the 18 day MVA).
POSITION: Stock only. No option chains.

http://www.investmenthouse.com/cd/itri.html

MCK (Mckesson--$39.83; -0.12; optionable (MCK): Drugs Wholesale
http://biz.yahoo.com/p/m/mck.html
STATUS: The stock has formed a pennant pattern off a previous bounce from its 50 day MVA (currently at 38), and the upper peaks in the pattern are hitting up against resistance in the form of a short term down trendline. Between that resistance and support of the 18 day MVA (which has held MCK the last 6 days as the stock tightens in the pennant), the stock will have to go one way or the other. Volume has been dropping off, appropriate for the consolidation, and with the strong money flow and positive buying, we are looking for upside resolution. Volume Monday was 1.06 million (avg. 1.4 million). Target: 48-50
BUY POINT: 41.63, on volume of 1.9 million or higher. Stop: 39 (18 day MVA, 39.53).
POSITION: Stock and/or November $35 or $37.50 calls to buy (MCK KG or KU).

http://www.investmenthouse.com/cd/mck.html

ACTN (Action Performance--$26.11; +3.71; optionable (QNC): Basic Materials Wholesale
http://biz.yahoo.com/p/a/actn.html
STATUS: The stock is in a big cup with handle base (previous highs are from 1999) and after traveling up the right side (lows from the fall of 2000 are at or near 2.30), began a pullback into a pennant pattern. ACTN had trended up nicely since January and was ready to correct, and Friday looks as though it completed the consolidation after Friday moving up from its 50 day MVA (at 22.50) on strong volume. That move continued Monday on increasing volume (619,200; avg. 372,000). Stronger resistance was at the 24.90-25 range (the June high is 27), so our buy point is at 25.77; ACTN remains a buy on this move. Shows good money flow and buying, and relative strength is breaking out.
Target: 30-31
BUY POINT: 26.35, on continued strong volume (minimum breakout volume is 502,000). A buy on the move up to 27.06. Stop: 23.45 (just under the 18 day MVA).
POSITION: Stock and/or October $20 calls to buy (QNC JD).

http://www.investmenthouse.com/cd/actn.html

Updates:

TTWO (Take-Two--$20.65; +1.32; optionable (TUO): Multimedia & Graphics Software
http://biz.yahoo.com/p/t/ttwo.html
STATUS: Earnings are out for this stock on Wednesday, and analysts are looking for good news. We mentioned TTWO over the weekend, and snap from the doldrums it did on Monday's move, bouncing from the 50 day MVA (19.15) even as volume was lower at 1.6 million (avg. 1.9 million). The stock is forming an ascending wedge pattern here after testing the 16 level on the July lows; that came after a fine run up to the June high of 24.50. We are looking for a surge in volume and a breakout over the pattern's upper resistance at 21.62, and the stock just might run into that earnings report. Showing strong money flow, and relative strength is breaking out. Target: 25-26
BUY POINT: 21.75, on minimum breakout volume of 2.6 million. Stop: 19.75.
POSITION: Stock and/or December $15 or $17.50 calls to buy (TUO LC or LW).

http://www.investmenthouse.com/cd/ttwo.html

Puts/Shorts:

QQQ (Nasdaq 100--$39.65; +0.05; optionable (QQQ):
STATUS: Closed a nickel higher than Friday's close after the index that day made a solid move up on higher volume. Volume dropped off Monday to 50.9 million (avg. 58 million), but if the market begins to sell back off that can rise, helping to drive the stock back down toward the August low of 36.54. The last time the QQQ hit the 18 day MVA, the resistance proved too much and the index traded back down to that low. That's over three points from here.
BUY POINT: Aggressive: 39, on rising volume in market selling.
POSITION: October $47 or lower (down to $40) puts to buy, with a strike that has a delta of 0.75 or higher. Deltas unavailable at the time of this writing; please check with your broker.

THE PORTFOLIOS: Each report, we look at these to see which is in a buy position. We don't cover them all each time, just the ones that look ready to pick up a few shares.

THE LEADERS:

New Leaders: ESRX, ACS, NVDA, DGX, EBAY, FRX, PSFT, ADVS, BMET.
Previous Leaders in which we are still interested: ADBE, SEBL, VRSN, VRTS

EBAY: Still at support (55) but on strong volume can't take out lower resistance. If it breaks below 55, it is a possible play down to 50 (200 day MVA).
NVDA: Almost 3 points today on strong volume, up from support. Resistance at 90.
PSFT: On a move below 35, a possible downside play to the July low (30).
FRX: At support (50 day) on low volume.
DGX: Broke over the 50 day MVA but on lower volume; look for support there.
ESRX: Up from the 18 day MVA but on lower volume; that level can support the stock from here.
VRSN: At resistance (the 18 day MVA) and may be ready to move back down from here. The August low is 41.85 (the stock closed at 47.69).

UP & COMERS PORTFOLIOS:

LNCR, BJ, LOW, HI, THQI, BBBY, IGT, CHS, KG

IGT: Not in a real pattern, but broke over resistance (50 day MVA) on a sharp rise in volume. Has much overhead support; we will take more interest when it gets over 60 (June high is 66.04).
THQI: Trying to form an ascending wedge as it holds the position above the 50 day and short term MVAs. Upper resistance at 55.
BBBY: Still weak, closing below its 18 day MVA after tapping near the 50 day MVA on the high of 29.96.
LOW: Dipping back on lower volume, tapping the 10 day MVA on the low near 38. Looks good.
CHS: Remains in positive territory, closing at resistance (36) on continued below average (and lower) volume. Support at 34.50 (18 day MVA).
KG: Looks good, but today's move was on continue low and decreased volume. Can pull back to the 44 range, but the pattern certainly is tightening.

MEMBER PORTFOLIO: New portfolio as selected by the subscribers. Some of these stocks are still struggling to move higher in their bases, and will likely continue to trade in close ranges just like the market. We'll be ready to catch them when they are ready to move. The new list: BRCM, CHKP, AMAT, JNJ, MSFT, AOL, HGSI, BUD, PXLW.

Old members: BRCM, CHKP, CSCO, EMLX, IDTI, INTC, JDSU, MVSN, NT, PWER, SUNW, VTSS

AMAT: Continued the move but pulled off its high as volume dropped back. The 50 day MVA is at 46.33.
JNJ: Really tightening up at its 18 day MVA as volume shakes out. Support looks solid still at 54, though the stock has not tested it for 2 days.
BRCM: The rolling play is held up due to low volume Monday.
BUD: We said it would get interesting on a move over 44, and the stock hit 44.40 on stronger volume, but sold back. At least it is sitting on TOP of its down trendline.

Good Investing!
Jon L. Johnson and The Daily Staff

All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Online Investment Services, LP or its paid consultants and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on our related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolio of Partners of Online Investment Services, LP or its paid consultants may, in some instances, include securities mentioned herein and on our web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors.

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