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Tom Aspray, professional trader and analyst was originally trained as a biochemist but began using his computer expertise to analyze the financial markets in the early 1980s. Mr. Aspray has written widely on technical analysis and has given over 60 presentations around the world. Many of the... More
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  • 4 Top Stocks Ready For A Rest 0 comments
    Sep 27, 2012 11:10 AM | about stocks: SWI, CRUS, LL, MLNX

    These four top performing stocks have had huge gains this year, but the monthly technical analysis favors a correction heading into the end of the year and MoneyShow's Tom Aspray recommends that investors have a plan in place to protect their profits.

    Stocks have stabilized overnight, as the unexpectedly large injection of funds by the Chinese central bank has had a positive impact. This appears to have temporarily offset the news over the Eurozone crisis.

    The day's close is what is important, and a higher close Thursday would be a short-term positive. The heavy selling Tuesday does favor a sharp day to the upside by early next week.

    Though the PowerShares QQQ Trust (QQQ) is up over 22% for the year, some of the top-performing stocks show triple-digit gains. While many of these top performers still look positive technically, there are some that have started to flash warning signs, and that makes a correction likely before the end of the year.

    Investors in these stocks need to have a plan in place now to protect their profits through either disciplined use of stops, taking partial profits, or by hedging their positions in the options market.

    chart
    Click to Enlarge

    Chart Analysis: Mellanox (MLNX) is a $4.1 billion Israel-based broad-line semiconductor company that closed 2011 at $32.49 and hit a high this month of $120.05.

    • The monthly chart shows that MLNX has closed above its monthly Starc+ band for the past five months.
    • It does look as though MLNX will close this month lower, and a close below the August low of $102.51 would be a sign of weakness.
    • The first support on the weekly chart is in the $90 area.
    • The 38.2% Fibonacci retracement support is at $84.62, with the 50% support at $72.97.
    • The monthly relative performance broke through resistance (line a) in May 2011. By the end of September 2011 (line 1), the RS line was clearly positive.
    • The monthly OBV was also positive. Volume surged on September 19, 2011, when MLNX showed up on a high volume scan.
    • Both the RS and OBV analysis have stayed positive for the past year, though they will turn lower this month. They confirmed the highs, so a correction will be a buying opportunity, but it may last several months.

    Lumber Liquidators (LL) is a $1.4 billion home-improvement company that has had a high so far in September of $54. This will be the third month that LL has closed above its monthly Starc+ band.

    • There is initial support at the September low of $46.66, with the major 38.2% Fibonacci support at $38.62.
    • The 50% support is at $33.76, which is very close to the 2010 high of $33.41. This should be the maximum downside for any correction.
    • The monthly relative performance broke its downtrend (line d) in January, and it moved above its WMA the next month (line 2).
    • Volume on February 22, 2012 was ten times the average, as the monthly on-balance volume (OBV) moved above its WMA.
    • The monthly OBV and RS are positive, but are well above their WMAs, suggesting their overbought status.
    • The weekly indicators have turned lower, but also confirmed the recent highs.
    • Resistance now stands at $53 to $54, with the weekly Starc+ band at $56.30

    chart
    Click to Enlarge

    SolarWinds (SWI) is a $4 billion software company whose September high at $60.95 came very close to the monthly Starc+ band. The chart appears to be forming a gravestone doji, which is consistent with an interim top.

    • There is next support at $51.96, which was the August low, with further levels at $48.64, the high from early June.
    • The 38.2% Fibonacci retracement support is at $45.16, with the 50% support at $40.29.
    • The monthly technical studies turned positive in early 2011 (line 1), as the RS line broke through its resistance (line a).
    • The monthly OBV also overcame the resistance (line c) that went back to 2009.
    • Both the RS line and the OBV did confirm the highs, but have now turned lower. The weekly studies (not shown) also confirmed the recent highs.
    • There is initial resistance now at $57, with the monthly Starc+ band for October at $62.

    Cirrus Logic (CRUS) is a $2.4 billion specialized semiconductor company whose circuits are used not only for the audio but also the energy industry. CRUS spiked to a high of $45.34 in early September, but now looks ready to close lower for the month.

    • There is next support at $35.54, which was the August low.
    • The 38.2% retracement support is at $32.80, with the 50% support level at $28.90.
    • At the end of January 2012, CRUS completed a tight seven-month trading range, closing strong at $20.43.
    • The relative performance moved well above its WMA in early 2012, and surpassed major resistance (line e) at the end of April.
    • The volume during the last two months of 2011 was low (see circle), but then it surged in 2012, which was a bullish setup.
    • The monthly OBV moved above its WMA at the end of March.
    • The weekly technical studies are declining, but did confirm the recent highs.

    What it Means: The monthly analysis of these four top-performing stocks illustrate how well the longer-term charts can be used to spot major trend changes and help one stay with the long-term trends.

    Those who have been long these stocks this year have tremendous profits, but should not be complacent. All four look vulnerable to a sharper correction in coming months. The confirmation of the highs by the OBV and RS analysis indicates that even a several-month correction will be followed by new highs.

    However, as we saw with SPDR Gold Trust (GLD) in 2011, corrections that follow multiple closes above the monthly Starc+ band can last quite a few months.

    How to Profit: No official recommendation, but I would suggest either selling calls against existing long positions on a move back toward or above the September high. Alternatively, take partial profits and/or use a stop under monthly support. Most importantly, have a plan.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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