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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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  • Bottoms Up for 4 Promising Equities 0 comments
    Nov 7, 2011 1:17 PM | about stocks: LEN, NE, SHO, VNM

    Completed double-bottom formations in three stocks and one nearly completed in a global ETF could provide good entry points and offer very good upside potential.

    As discussed last week, double-bottom formations were observed in many stocks and ETFs at the October lows. This formation can provide many good entry points for both traders and investors. As noted in the article, full-time or professional traders can often spot good entry points just after the second low of the double bottom is being formed.

    There are other ways to trade this formation, however. To confirm a double-bottom formation, prices need to move above the intervening high, preferably on good volume. Often times the breakout level will be retested, and when this occurs, it can provide a good entry point.

    Three stocks in particular have now completed their double-bottom formations, while the pattern evident in one emerging-market ETF could be completed in the next week or two.

    chart 
    Click to Enlarge

    Chart Analysis: Lennar Corp. (LEN) is a homebuilding stock that moved above resistance at line a on October 12, completing the double-bottom formation (points 1 and 2). The low at point 2 was $12.14, just below the prior low at $12.39.

    • The upside target from the formation is in the $18.15 area, but remember that these are just the initial targets. There is additional resistance in the $18.40 area
    • The relative performance, or RS analysis, confirmed the bottom formation by forming higher lows (line c) and then moving above resistance, line b
    • The on-balance volume (OBV) formed a positive divergence at the lows, line e, and then moved through its downtrend (line d)
    • There is first support in the $15.50-$16.00 area with stronger support at $15.00

    Noble Corp. (NE) is an oil and gas exploration company whose shares made marginal new lows at $27.33 on October 4 (point 2) before turning higher. The prior low on August 8 was $27.68, point 1.

    • The move above the intervening high at $35.84 (line f) completed the double-bottom formation
    • The upside target from the formation is at $44.00 with additional resistance at $46.00
    • The RS line formed higher lows, line h, which was confirmed by the move through resistance at line g
    • Volume was heaviest at the August low (see arrow) and the OBV was much higher in October, line j
    • This bullish divergence was confirmed by the move through the downtrend, line i
    • There is first good support at last week’s low of $34.02 with stronger support in the $32.00 area

    chart 
    Click to Enlarge

    Sunstone Hotel Investors Inc. (SHO) is a hotel/motel REIT that has a current yield over 19% and reports earnings after today’s close. SHO also made marginally lower lows in October at $4.79, point 2. The August low was at $4.98 (point 1).

    • Key resistance at $6.10 (line a) was overcome on October 13. This completed the double-bottom formation
    • The upside target at $7.22 was exceeded on October 27 when the high was $7.38
    • The 50% retracement resistance is in the $8.00 area
    • The RS line has completed its bottom formation by moving through resistance at line b
    • There is initial support now at $6.60-$6.80 with stronger support at $6.10-$6.25

    The Market Vectors Vietnam ETF (VNM) is a $240 million fund that yields 1.9% and is fairly lightly traded with an average volume of 142,000 shares per day. VNM made an initial low in August at $17.00 and made a further new low in October at $16.64.

    • VNM has bounced from the lows but needs to move through the resistance at $20.68, line e, to complete a double-bottom formation
    • A completed pattern would give upside targets at $24.30
    • The RS line is still in a downtrend, line f, and has recently made new lows
    • The OBV formed a bullish divergence at the recent lows, line h, and has moved through its downtrend (line g). It is acting stronger than prices
    • There is next support in the $17 area

    What It Means: The bullish volume and RS analysis of the three stocks suggests that they can move well above the double-bottom price targets. Therefore, a drop back to support with stops under their retracement levels should have good profit potential.

    With Sunstone Hotel Investors Inc. (SHO), the very high yield makes me more cautious, and combined with today’s scheduled earnings report, only buy at much stronger support where a tighter stop can be used.

    For the Market Vectors Vietnam ETF (VNM), I am looking for a higher weekly close to confirm the OBV analysis that a bottom is being formed.

    How to Profit: For Lennar Corp. (LEN) the previously recommended buying zone was not hit. Look to buy at $15.42 with a stop at $14.22 (risk of approx. 7.6%). If filled, on a move above $17.50, raise the stop to break even.

    For Noble Corp. (NE), buy at $35.28 with a stop at $32.62 (risk of approx. 7.5%).

    For Sunstone Hotel Investors Inc. (SHO), go long at $6.16 with a stop at $5.66 (risk of approx. 8.1%).

    For high-risk traders, if the Market Vectors Vietnam ETF (VNM) closes on Friday (Nov. 11) above $17.88, buy at $17.92 or better with a stop at $16.52 (risk of approx. 7.8%.

    Themes: Stocks, ETFs, Double Bottom, Pattern Stocks: LEN, NE, SHO, VNM
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