Sunday, October 29, 2006

The "reasoning" behind SMSI long

On Wednesday night of October 25th ( I run my screens daily ) SMSI has come up on one of my basic screens showing stocks within 10% of 52WH, having small float = 20M, substantial short interest of 33% and with institutional holdings slightly above my "comfort level" of 40% - SMSI has 55%. So far so good.

When I look at ANY stock I use multiple time frames to analyze price action, let start from 3 years weekly part.

Stock is in its "base 4" phase ( this is when most stocks which did not go below prior base fail its advance) - there is not much to like here, this is a time when retail investors jump into the stock and then find themselves holding a bag for a long time.
If you look at weekly chart for last 3 years, base 1 ended on 5/2 2003, base 2 ended on 8/6 2004, base 3 ended on 5/3 2006 ( not exact dates, but you get the point ).

Now it is in base 4, June 2006 to October 2006 which is not classically shaped, has rough edges, big ups and downs, sharp button of the base, strong run up last few weeks, not really comforting to me, this one to keep an eye on at all times.

On week of 10/13 2006 SMSI hit 52WH on strong volume, week of 10/20 another 52WH on above average volume, not to worry about red week - it was only down .85% - to me even without using technical indicators it says "accumulation".

Now daily chart for the last month
first latest 52WH was set on 10/10/06 on high volume, another 52WH on 10/11/06, there was no follow through which is explained by substantial advance from the buttom of the base in short time, still on 10/11 SMSI gave up only 4.3% out of prior day's advance of 8.54%. Another 52WH on 10/16 on no volume, this caused weak hands to get out next few days with "shake off" on 10/19 down to 25MA line, but still, closed above 6/5 - 7/26 resistance level of $15.5.

Now, lets look at 10/19 - 10/25. SMSI has formed small ascending triangle on very low volume, which is great in this case since it shows that not too many traders were getting out, apex formed on 10/25 - night I posted it as long pick ( along with IIG ).

If I would be a big fan of candle patters I'd be scared by "Dark Cloud cover Bearish" formed on 10/27, but - I'm not a big fan of such things, here is why -I think in order to use many of candlestick patters you have to be an expert, perfectionist, hey - MARKET IS NOT PERFECT. I respect "hammers","engulfing" and .. that's about it.

Average volume dropped to about 800K during last 10 consolidation on the top days, relative strength is quite good - above 60 most of the days.

Now - last 2 days, strong closes with a lot of buying into the close. You might oppose me and say: "On Friday there was a huge dump of over 100K right into the close" - NOT. Don't be confused by last 2 red candles on 5 minutes chart. First brought SMSI down .12% on volume of about 25K, and the second and last moved stock down another .12% on volume of 95K - can you call it "selling into the close"? I cannot, because if it was just selling stock would plummet on that volume, what it was? Will we ever know?

As almost always the case with stocks I trade SMSI has quite healthy for grows stock fundamentals.

And last, but not least, Investors Business Daily (after looking at my blog?) posted "chart of the day" on Saturday Oct 28th night which you can see for free till Monday evening here

Earnings due Wednesday Nov 1st after the market close
- it is ALWAYS a gamble, good luck to all of us ( If earnings play makes you feel uncomfortable - you'll have 3 days to close your position - if you have one )