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Sunday, February 29, 2004
Good evening friends,
Market Overview
The buyers' strike is still on with no sign of anyone coming out of the woodwork to purchase stocks. The NASDAQ continued its losing ways last week with its 6th straight losing week. I mentioned that we could bounce as high as 2070 but after looking at fresh charts tonight, I don't think we'll even get to that level. The NASDAQ has to fight through the 50 DMA which currently stands at 2050, and I don't think it has the power to get above it. This 50 DMA resistance looks to me like a good price to enter short positions. Any time a stock or an index falls below the 50 DMA and can't recover immediately, it's in trouble and I'm afraid the NASDAQ is in pain right now.
It Is What It Is
The good news is the Dow and S&P are still in good shape and that may be enough to carry the NASDAQ. I still believe cash is king and will be until the NASDAQ chart repairs itself. It could be weeks or even months before this happens folks. You must prepare yourself for this upcoming trading draught. Limited long positions are advised at this time. A bear flag is present on the chart of the NASDAQ and it's not a pretty sight. Those of you in cash right now have made a very wise move in my opinion. This bear flag could lead to a major drop from current levels and extreme caution is advised if you are long. The 200 DMA sits at 1851 and a hard sell off could easily take us down to that level. A couple more days of selling could start a snow ball effect and crumble this index into capitulation selling. Things get real shaky when you are under the 50 DMA and all long bets are off until we rise above this average again. Hold cash for the week ahead, with tight stops in place for any and all long positions. I will be stopped out of EAG this week I'm sure, 1.48 is my stop price.
Friends, I hate to bring news like this to the Commentary but better to be truthful than to have you trading and getting continuously stopped out. A lot of small losses can add up in a hurry. I would be more bullish if the NASDAQ could close above the 50 DMA and get the other averages lined up correctly. Until that happens, the Bear is in control. I wish I had better news but it is what it is.
Dilution
Lately we've seen examples of stocks announcing they are seeking approval to release new shares. Typically those announcements are met with a hasty retreat in the price of the stock. It all comes down to perception, and the market professionals know that the herd will react negatively to this news so; they use the opportunity to take profits and then buy back in at a reduced price.
Dilution is a term we see discussed when a company wants to issue new shares. Whenever the herd hears that a company wants to dilute their shares, they tend to react negatively, and the stock price falls. Don't be mistaken, there is such a thing as truly bad dilution. Companies that perpetually issue shares, yet never seem to have enough cash on hand to handle their needs, are companies that you want to avoid. We try to teach people to avoid all the hype, anger, and frustration that are constantly being shouted at traders from all directions. Keep your mind clear and learn to read beyond the headlines.
Dilution can be a good thing if the company is growing and is using the issuance of stock to further that growth. Every company needs cash to survive and to grow. Learning to recognize that and understand it will prevent you from being herded. You'll learn to see that dilution, when done properly, can actually be the fuel that turns a low priced stock into a rocket ship. Recent examples of stocks taking off after a reverse split are PCLN, NIKU and INSP. There are more, but these come to mind since I had them on the Bulletin back in May 2003, before their splits. TFSM is another stock that recently announced a reverse split. My bet is, once the dust settles, the stock price will rise. Cash is the fuel that companies must burn if they are going to lift off and reach new heights. Don't let the dilution myth fool you into selling those shares before the company can use the cash to grow share holder value.
Some OTC BB stocks for your watch list are VTSI, EXBT, GTEL, GUSH, and ICOA
As always, thank-you for your support past, present and future! Have a great night everyone; we'll see you all Monday evening.
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