October 21, 2005 8:42 am (CST)
A-Z Morning Report
One day after the U.S. equity markets staged a major rally, Wall Street exhibited its other side yesterday - neurosis, as the equity indices all lost most if not all of the ground gained during Wednesday's session. The Dow Jones Industrials led the way, plummeting over 133 points, completely wiping out all of Wednesday's gains and then some, closing at 10,281 and change. Meanwhile, the Nasdaq Composite did hold onto some of the previous session's gains, dropping just over 23 points to end at 2,068.11 and the small cap Russell 2000 fell 10 3/4 points to finish at 627.54. It looks like we're getting a small bounce however in early trading this morning as internet powerhouse Google came out with better than expected earnings after the closing bell yesterday, blowing away revenue estimates which topped $1 billion in the quarter for the first time ever. Let's see if we can build on this good news...
Stocks to watch:
WSTL - while our highlighted stock of the day from yesterday's report, Electro Energy Inc (EEEI), gained over 75% on an intraday basis yesterday before settling back to close with a gain of just under 50% on the session, Westell Technologies (WSTL) had a less impressive performance, gaining just under 6% to close at $4.28 after hitting an intraday high of $4.50. Still, not bad considering the overall miserable market environment both stocks in which both stocks were trading. A closer look at the near term techncials however, suggests that shares of WSTL could be headed significantly higher over the next few weeks, so we thought it worth our while to examine it a little closer this morning. The Company just announced third quarter earnings on Wednesday which came in at about what analysts were expecting, so we got a small bump yesterday. Westell is profitable, earning $0.57 per share over the past year and yesterday's close at $4.28 isn't far from the stock's 52 week low of $3.56 and well off it's 52 week high of $7.86, making the risk level low for this stock and the upside potential much higher.
Westell Technologies, Inc., a holding company, engages primarily in the design, manufacture, and distribution of telecommunications equipment. It produces customer networking equipment (CNE) and network service access (NSA) product lines. The CNE product line includes broadband and digital subscriber line technology products that enable the transport of data over the local loop. These products enable telecommunications companies to provide broadband services over existing copper infrastructure. The company’s broadband products also enable residential, small business, and small office home office users to network multiple computers, telephones, and other devices to access the Internet.
The NSA product line consists of manageable and nonmanageable T1 transmission equipment, associated mountings, and special service plugs for the legacy copper telephone network. Westell, through Conference Plus, Inc., provides audio, video, and Web conferencing services to businesses and individuals. The company sells its products through domestic field sales organization and selected distributors to regional bell operating companies within the United States, as well as to various other entities, including public telephone administrations located outside the United States, independent local exchange carriers, competitive local exchange carriers, inter-exchange carriers, Internet service providers, and business enterprises. Westell also markets its products in Canada and Europe. The company was founded in 1980 and is headquartered in Aurora, Illinois.
A quick look at the stock's near term technicals shows some very decent upside potential from a chart perspective. Yesterday's move was clearly a break out (to the upside) from a narrow trading range roughly between the $3.50 to $4.00 level that has been in place for nearly three months. Prior to that, the stock fell precipitously gapping lower from the $6.50 area down to the $5.00 level back in late July of this year - a gap that the market has yet to attempt to even partially fill. Remember, the market hates a vacuum and at least a partial fill of that gap is probably imminent, maybe in the very near future.
After some huge distribution in money flow that accompanied that drop in the stock's price in late July, money flow has been anemic. However, we have seen the first signs of real accumulation over the past few sessions, something we haven't seen in this stock in several months. Additionally, yesterday's closing price of $4.28 put the stock squarely above the high end of our set Bollinger Band parameters, suggesting further upside movement is likely over the next few sessions. Prior to that breakout, the Bollinger Bands had narrowed significantly as well, a signal that usually portends a break out is imminent (either to the upside or downside and in this case it appears to be to the upside).
Our MACD indicators have also been trending sharply higher since early August of this year and the uptrend is significant enough to have created a huge divergence between these indicators and the stock's actual price action over the same time frame. In the stock's near term relative strength indicators, we've also seen a gradual, but steady rise from oversold levels to mid range with decent upside still intact before threatening an overbought situation. Finally, Westell's shorter term stochastics are approaching near term overbought status and yesterday's move higher did create a small gap up on the price chart, which leads us to believe that a retreat back to near the $4.00 level is quite possible over the next few sessions and may be a better entry point for a short term trade than yesterday's closing price of $4.28. Translation - a 'buy on the dip' strategy may be the way to go here. As a result, we're making Westell our first spec play of the day (below) this morning and reiterating our listed buy / sell range.
Spec Plays:
WSTL - Buy Range - $4.00 to $4.50 (risk to a break below the $3.50 area). Sell Range - $6.50 to $7.00. Previous close - $4.28.
CCUR - Buy Range - $1.50 to $1.75 (risk to a break below the $1.33 area). Sell Range - $2.50 to $3.00. Previous close - $1.64.