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SUBSCRIBER QUESTIONS

Q: Thanks again for your great reports. I was wondering if I could get your input on JDSU in the very short term like in the next bounce. Took a pretty big hit again so looking for cheaper stocks for one or two plays until we can play the indexes again. It seems we lose maybe 1 out of 10 trades but the 1 loss always seems to hurt the most.

A: Your question has a couple of very good points in it. First, let's look at JDSU. A major fiber equipment company that enjoyed explosive growth in 1998 and 1998. It was another one of those Cinderella stories that made investors a lot of money. Then it became the darling and everyone had to have it. That was just about the time the market started to correct. As it sold off, analysts continued to tout it; if it was a value at $200, it was a real value at $100! It closed Friday at $5.36.

Since June it fallen from 18 to about 6, a two-thirds drop. After testing the 50 day MVA in April and May, it started the latest downtrend. As we covered in TA1 seminars, stocks in uptrends or downtrends tend to test the 50 day MVA and then ride up or down the 10 and 18 day MVA as they continue their trends. They usually make 4 to 5 rotations and then test the 50 day MVA again. As for JDSU, that means it tested the 50 day MVA, and now has bounced down, bumping up against the 18 day MVA as it moves up after every time it sells down. JDSU has been in such a strong downtrend, it has not yet broken back up toward the 50 day MVA; there has been no relenting with respect to the sector to allow it to rally back up. In fact, since early August, it has not even been able to rally up to the 18 day MVA. It too is getting very oversold, and volume is up the last three sessions as it is trying to make some bounce higher. Right now the 18 day MVA is at 6.50. At this point it would be a good move to see it rise to that level. If you buy 1,000 shares, you could pocket $1000 or so on that move (depending upon your commission charges). That is a tough trade right now; by the time we determine it is a real move higher, it has eaten up most of the move as it clears its 10 day MVA. The better play is an oversold rally up to the 50 day MVA. That would mean letting it clear the 18 day MVA resistance to give us better odds. Otherwise, JDSU may just continue to bounce down from that 10 day MVA, becoming more and more oversold. Let it change its pattern and start that bounce higher over near term resistance. Is it the best play out there? Not in our books, but it can be done.

The other note in the play is one of the hardest: that one trade that wrecks your other winners. In this market be ruthless in cutting losses or taking profits. Sometimes a stock gaps away from you and there is not a lot you can do about it. In most instances, especially in this choppy market, a move starts to fizzle before it really gets where we want it and we freeze, hoping it will continue, knowing it probably won't. Then we get hurt. Avoid the hope; kill it before it really hurts and look for the next better game.

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.

*Additional note: Deltas for options were unavailable at the time of this writing; please check with your broker for that information.

BEST PLAYS: CTEC continued its breakout; volume remained well above average though lower. We'd like to see this one continue running, since that is what it did on its last breakout (a 4-point run). We still like BRCM and IMCL, RMCI and others. We are continuing to watch the indexes as they get closer to finding a floor to the moves down this week.

Stocks/Indexes from Thursday's report:
RMCI: Gained again with volume remaining high though decreasing. Can find support at 24 if it pulls back here, but remains a buy on the breakout up to 28.85 (closed at 25.22).
PEP: Pulled back a bit far for our liking (below the 18 day MVA), and on stronger volume. We will see what it does from here, but not a welcome move.
BRCM: Began a move up with rising volume, but pulled off the high. We think it will hold support above the September low of 21.65, however. On a strong move up from here in a rally, we are looking at an aggressuve buy point just over 25 on continued strong volume (18 million Friday), stock and/or November $20 calls to buy (RCQ KD).
QQQ: Posted a new low as it tries to find a bottom.
DJX: Tapped about a half-point lower than we pinpointed, but bounced from its new September low of 80.64.

Previous plays:

IMCL: Sold back after breaking out of its cup with handle. It closed at the 10 day MVA on decreasing volume; watch positions if you do not want to ride positions through a possible bounce.
MCO: Broke support of its 50 day MVA on stronger volume, but bounced back. It is below the up trendline now, however. We will keep an eye on it.
BLL: Holding at the 18 day MVA, moving up from a low as volume shot higher. Looking for a move over the 56 level.
GIS: Tanked on selling, breaking the 50 day MVA on strong volume.
SMTC: Fell to 26 and showing a doji.
BAX: Lost its grip and sold back below the 50 day MVA.
SLNK: Fell back to the 50 day MVA from where it bounced slightly. Lower volume suggests a hold at the support.
DP: Bouncing between 42 and the 50 day MVA (38 range); needs to settle down in the pullback from the breakout.
CFFN: Holding above 18 support level, but volatile after breaking support of the short term and 50 day MVAs (on a drop from a nice lateral pattern formed late August/early September).

Best Plays:
1) PSSI: Getting ready to rally to a new high.
2) MOVI: Just waiting for a rally at this point.
3) ITRI: Moving up on strong volume.
4) QQQ: Ready for a move up.

New:

PSSI (Pss World Medical--$8.27; +0.01; optionable (PYQ): Medical Equip. Wholesale
http://biz.yahoo.com/p/p/pssi.html
STATUS: Broke out earlier this month and pulled back in a test to the 18 day MVA (7.89) by Friday; the stock tried to hold at the 10 day MVA Thursday with a doji (8.20) but the 18 day MVA was the last support level from where it broke out, so we don't mind the pullback at all. Volume remained below average and steady at 533,800 (avg. 545,818) as PSSI moved up from the support level, closing at the Thursday doji. We are looking for a breakout over the breakout high (8.99). Looking at medical stocks as those that can move into leadership positions in a rally. Target: 10-11
BUY POINT: Aggressive: 8.35, on above average volume. Stop: 7.75 New high breakout: 9, on volume in the range of 700,000. Stop: 8.37
POSITION: Stock and/or November $5 or $75.0 calls to buy (PYQ KA or KU). Deltas unavailable at the time of this writing.

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

MOVI (Movie Gallery--$19.27; +0.74; optionable): Specialty Retail
http://biz.yahoo.com/p/m/movi.html
STATUS: After reaching an August high of 23.63 after a fine uptrend beginning January, MOVI has pulled back, testing first the 50 day MVA (17.10) and then 14 on Monday. The stock immediately bounced, and on huge volume Wednesday (on a good earnings outlook and news of renewed sector strength) gapped above its short term MVAs, forming a short double bottom. Volume dropped back sharply over the last 2 days of the week, but rose slightly Friday as MOVI first tested the 50 day MVA on the low of 17.19 then bounced back up again (handle). We are looking for the stock to rally with the market; ahead of that, it can hold support at the 18 day MVA (18.33 range). Volume was up to 426,600 (avg. 328,272). Target: 27-28
BUY POINT: Aggressive: 20, on average or higher volume. Stop: 18.25. Potential resistance at the 20.37-20.40 range. Breakout: 23.76 on volume in the range of 316,000 or higher.
POSITION: Stock and/or December $20 calls to buy (QLV LD). Deltas unavailable at the time of this writing.

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

FIMG (Fischer Imaging--$12.20; +2.20; no options): Health Services
http://biz.yahoo.com/p/f/fimg.html
STATUS: The stock corrected off an August high of 15.41 after a fine run up from the 6 range (starting in July). It pulled back on decreasing volume until catching support at the 10 range, and from there made a super move up Friday, breaking back over the 50 day and short term MVAs (the latter at 11.75, the 18 day MVA). Volume shot up to 246,300 (avg. 114,000). Looking for a continued move up on the momentum, and a breakout over the recent high. Initial target: is 15.41, however, the August high. Huge money flow, good buying and relative strength that is breaking out ahead of price.
BUY POINT: Aggressive: 12.50, on continued rising volume. Stop: 9.10
POSITION: Stock.

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

Updates:

ITRI (Itron--$20.04; +0.30; no options): Scientific & Technical Instruments
http://biz.yahoo.com/p/i/itri.html
STATUS: Last on the report late August. The stock was in an ascending wedge pattern but fell out of it at the first of this month; after selling back down to 14, made a nice run back up though volume was iffy backing the move (not strong and on some up moves was lower). That volume was decisive Friday, however, sharply rising to 419,400 as the stock opened at support and moved up to previous resistance in the ascending wedge (average volume = 220,636). We like the pattern, the high volume and the break of sturdy resistance on this move (20, hit 11 time in the wedge). The intraday high hit more at 20.25, not quite as stiff, and there are the August and July highs (21.19 and 21.75, respectively). Target on a breakout from here: 25-26
BUY POINT: Aggressive: 20.38, on continued rising volume. Stop: 17.50. Breakout:
21.88, on continued rising volume (minimum breakout volume is 298,000). Stop: 20.13
POSITION: Stock only. No option chain.

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

IMCL (Imclone Systems--$53.30; -5.64; optionable (QCI): Biotechnology
http://biz.yahoo.com/p/i/imcl.html
STATUS: Broke out Wednesday and Thursday on great volume from its cup with handle base, but Friday sold back on decreasing volume (5.58 million; avg. 1.3 million) to close at the 10 day MVA. The stock is likely to drop back to the 18 day MVA at 51.92 as it tests the breakout, since it has already moved back below the buy point of 54.35. On a hold at the 18 day MVA, we will look for a bounce back in a rally for a strong move back over the high. IMCL is one stock that has held up very well and we are looking at it for leadership when the market rallies. Target: 69-72
BUY POINT: Aggressive: 54.50 (back over the original buy point) on a strong bounce in a rally, volume in the range of 3 million. Stop: 50.68 (below the 18 day MVA).
POSITION: Stock and/or November $50 calls to buy (QCI KJ). Deltas unavailable at the time of this writing.

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

Indexes: We are looking for a move up in the DJX as well, after a possible test of Friday's new low of 80.64 (November $80 calls to buy (DJX KB).

QQQ (Nasdaq 100--$28.19; -0.78; optionable (QAV):
STATUS: The QQQ hit a new low in its downtrend at 27, then bounced back up. The index tested on the high of 28.97 Thursday's closing price, so that level will be potential resistance on a move up from here. We look for a hold at or near the low, for a move up in a rally. Target is at the 33 range (the 18 day MVA is at 33.57, but there are some lows from earlier in the month just below that); watch the 10 day MVA at the 31.61 range for potential resistance on the move up.
BUY POINT: Aggressive: 28.30, on continued strong volume, which Friday was up to 112 million (avg. 65 million). Stop: 26.32
POSITION: December $20 or $21 calls to buy (QAV LS or LY). Deltas unavailable at the time of this writing.

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: Removing BMET, which sold below the 200 day MVA once again, and EBAY, which did the same, capping off its month-long+ downtrend. As the market bottoms we will be putting new stocks in the portfolio that emerge as strong leaders.

New Leaders: ESRX, ACS, NVDA, DGX, FRX
Previous Leaders in which we are still interested: VRSN

ACS: Some profit-taking on a move back down to close above its 10 day MVA. Volume was higher and very strong.
ESRX: Another drop below the 200 day MVA on rising volume.
FRX: Didn't hold the 200 day MVA, dropping to another doji with volume rising.
DGX: Gapped over 4 points down and held there with a doji. Volume was huge.

UP & COMERS PORTFOLIOS: THQI, KG

As with the New Leader portfolio, recently some Up & Comers stocks have been hard hit. Removing CHS, as is is not at this point able to recover back over the 200 day MVA. We will put it back on as with other removed stocks when and if they make strong recovery moves.

THQI: Heaved back over the 200 day MVA on rising volume. Solid move; we will see if it holds the support this time.
KG: Pulled back but remains above its 200 day MVA; volume is decreasing.

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

JNJ: Looked fantastic early in the day, vaulting to a high of 55, but sold back down to its 200 day MVA. It is trying to hang in there with the Dow selling, and did bounce back to close back over the 52 support level.

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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