Novice Investing - Technical Update

Date: Friday 29th 2008f August 2008 02:06:23 AM

Technical Update - 04/21/2005

By: Hari Wibowo

It is time for another technical update! Time really flies. In this column, I will update the technical aspects of the stocks that we have discussed in our portfolio section. As you may know, our methodology is combining the power of fundamental analysis and technical analysis.

Western Digital Corporation (WDC)

We first mentioned WDC on 11/19/2004 column. At the time, I calculated the fair value of the stock at $11.35/share. The fundamental has improved and it has since risen to $12/share before pulling back. So, should you sell if you own the stock? Let's see now. On our previous technical update, I recommended selling if WDC went down with high volume of around 4 million shares. What has changed now? Well, on late March '05, WDC went down at a high volume of 5 million shares. Those owning WDC should be selling then. It is true but after the selling pressure, WDC resumed its uptrend as shown on the graph below.

This is one of the uncertainty of technical analysis. 5 million shares was a huge volume. However, it is followed by an even bigger up volume (close to 10 M shares in this case). But, of course we should not regret it. Our fair value analysis shows that WDC has a fair value of $11.35/share.

When to sell: Sell when this uptrend is broken ( currently resides at $12.20). But broken uptrend is not a sure signal to sell. Watch for the volume at the time of the selling as well. High down volume is a confirmation that WDC should be sold.

Hint: As shown here, using technical analysis may not give you the right time to sell. Therefore, in our analysis we emphasize on 80% fundamental analysis and 20% technical analysis.

Krispy Kreme Doughnuts Inc. (KKD)

We first mentioned KKD on 11/30/2004 column. At the time, I felt that the stock is fairly valued at $10.0/ share. For a 50% return, KKD needs to be bought at around $6.50/share. Even then, I felt that it is still a risky investment. On our last technical update, I concluded that we need to wait until KKD can break its broken trend line (it was at $9.50/share). It turns out to be the top and KKD has since fell into below $7/share..

High up volume on March 2005 is certainly encouraging. However, KKD is still in the downtrend line. It looks like selling pressure has abated for now. KKD plunged to below $7 in moderately high but not huge volume.

When to buy: If you like the fundamental, KKD can be bought at the bottom of the downtrend line. Watch for the volume at the time of the buying as well. Down volume needs to be LOW. At the moment, I prefer down volume of 3 M shares or less.

Hint: Remember that we emphasize on fundamental analysis more than technical analysis. (85% fundamental to 15% technical). The latest information on KKD is that their same store sales is down 15% from last year. This is not good at all. Remember that when we get $10 fair value for KKD, we need sales to be increasing. With sales down 15%, fair value of KKD is even lower. Therefore, while it is tempting to go buy KKD when it hit $5.50 based on technical analysis, please review the fundamental before you proceed.

Merck & Co Inc. (MRK)

We featured MRK on 02/23/2005 and our calculation shows that MRK has a fair value of $43.95/share. We are currently waiting for MRK to go to $29.3/share before buying the shares for investment. No chance. The share price has risen even higher since our last update.

The technical picture of MRK has improved with the high up-volume in mid February of 2005 and another one in Mid April. It broke $32.50 resistance with good up-volume.

When to buy: With the stock already at an uptrend line, technical picture is actually a buy at MRK. The high up volume on February of 2005 is a good sign to buy. The technical shows that it can go to $40 as long as the stock does not fall with huge volume. So far, it did not. Therefore, expect $40 in the next twelve months.

Hint: Please remember that buying MRK now will not give 50% return on investment based on the calculation of MRK's fair value.

Leap Frog Enterprises Inc. (LF)

Our stock portfolio pick, LF, has been hammered in the past couple of months. The technical picture is not pretty at all. In previous update, LF was trying to fill the gap that occurred on mid February 2005. It did fill that gap before falling down at low volume. The technical does not scream buy at the moment so wait until it all plays out.

When to buy: Wait for LF to bounce up the $10 support line at HIGH volume. Right now, it is a pivotal moment for LF. Either it bounce or break down to below $10 with high volume. I guess the catalyst will come on April 29th during its earning report.

Hint: LF has a fair value of $23.40/share. I still feel LF has only encountered short-term problems for its product lines. On April 29th, we will see if it still holds. However, our methodology is combining the power of fundamental analysis and technical analysis. Right now, the technical picture screams more towards sell than buy. I would wait until the technical picture improves before I start buying.

Fresh Del Monte Produce (FDP)

Our stock portfolio pick, FDP, has risen modestly since we last picked it. The stock is currently moving sideways. There is nothing much going on since our last update.

When to buy: You can buy the stock when it approaches the $28 (uptrend line) at low volume. Make sure it does not break the trend line with high volume.

Hint: If and when FDP falls to $29/share, it can be bought as it represents 52% potential appreciation. Please watch the volume carefully when it falls to $29/share.

Magna International Inc. (MGA)

Our stock portfolio pick, MGA has a really negative technical analysis. The stock is breaking support after support with an increasing volume. Not a good sign at all. What is next? It is near 52 week low and there is no nearby support until it falls to $50. Therefore, if MGA falls again, $50 is the level to watch. If it falls to $50 at a big volume and then bounce off it at an even HIGHER volume, then $50 might be a technically good buy there.

When to buy: Watch the $50 for now. If it breaks $50 at a huge volume, then it is better to wait until the selling pressure abate.

Hint: I like MGA from the fundamental point of view. However, the technical suggests that the fundamental might be getting worse. We'll see about that.

Conclusion

I would try to update the technical aspect of the stock in our portfolio from time to time. This article is intended to help investors to refine their entry points. It is by no means the center stage of investment analysis. Remember, our investment decision consists of 80% fundamental analysis and 20% technical analysis. To view our articles for the portfolio, please click here.

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