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TECHNICAL INDICATORS


Using The News To Find Trades

04/22/08 09:00:31 AM
by Mike Carr, CMT

Earnings releases and the biggest movers lists can highlight stocks ready to move.

Security:   DGX
Position:   Buy

Quest Diagnostics (DGX) is the largest US medical testing company, performing tests for doctors, hospitals, and employers. It reported a 32% increase in quarterly profits and the stock moved sharply higher. It gapped up more than 3% on the open, and traded more than 15% higher during a generally down day. Recent bad news knocked the stock down by 25% over the previous six months. At a price under 50, the stock trades at about 16 times the earnings projected for this year. The company expects earnings per share to nearly double to between $3 and $3.20.

Despite the large move, a bullish case supports further gains in DGX. Figure 1 shows that price is right at the 20-week moving average. The stock is testing a downward-sloping trendline at this level as well. In addition, the stochastics and other momentum indicators are favorable, turning higher from an extended oversold condition.


FIGURE 1: DGX, WEEKLY. The weekly chart shows a selling climax and then a gap breakout from a short consolidation zone. This is a bullish scenario.
Graphic provided by: Trade Navigator.
 
Additional bullish support is found in the large short interest in DGX. Buyins.net reports that shorts will need more than 12 days of normal trading volume to cover their positions in this stock. With more than 10% of the float shorted, there is a lot of potential demand. The squeeze trigger represents the average price level where short positions were initiated. At this level, many shorts are likely to cover their trade and find a more profitable opportunity in the market. Buyins.net calculates that the average short is now losing money since the squeeze trigger is 48.45, just below the current price level. DGX represents a strong buy.

Conservative traders can wait for a decisive break of the moving average, entering at 50. Aggressive traders should buy now. A close below the gap, near 46, offers a good stop with very low risk. Overhead resistance at 58 is the initial target on this trade.




Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."

Website: www.moneynews.com/blogs/MichaelCarr/id-73
E-mail address: marketstrategist@gmail.com

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