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Yola Edwards

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The old rules don't apply

Yola Edwards

When a stock's market value falls below $5 it may be deemed an unsuitable investment, or if it falls to $10 you may put it under review. Further, if the company's capitalization falls below a certain key level that may also be a trigger to replace the stock. Those may have been the old rules but with global markets having declined by some 50 per cent or so, many stocks have fallen below those key levels thus to keep the price or capitalization cut-offs would mean having to eliminate too many relevant companies and missing potential opportunities. But then again, there are the obvious ones that must just go.

If you haven't said good-bye to Nortel Networks Corporation, it's time to do that. Nortel is in talks to break up instead of trying to rebuild itself under bankruptcy protection. Not that anyone needs any more tax losses, but this one should perhaps be easier to let go than some of your other holdings.

You might want to look at replacing it with JDS Uniphase, not that it's an equivalent dollar trade replacement of course. JDU, as it is commonly referred to by its Canadian ticker symbol, is expected to post a profit this year. The stock is below the $5 threshold and is considered to be speculative but is it a potential turnaround situation? According to Thompson Financial Networks, JDS Uniphase is expected to earn $0.21 for the current year. That would compare with fiscal year 2008, when the company reported a GAAP net loss $21.7 million or $0.10 per share and a GAAP net loss of $26.3 million or $0.12 per share for the fiscal year 2007.

Technically, the share price appears to have put in a double bottom over the past five months. On March 23, when the stock traded at $4.39, the MACD issued a buy signal as it crossed the signal line and two days later the short-term moving averages staged a positive crossover further underscoring a positive trend change. However, since then the stock traded to the upper overbought Bollinger band and the RSI also registered an overbought level suggesting a short-term pull back is likely. The Friday March 27th trading session ended in a bearish engulfing candlestick pattern further signalling a pullback. Sure enough the stock gapped open lower on Monday March 30, falling to daily support offered at the 10-day MA at about $4.40. A daily close below that would suggest a downside target at about $3.86 which would offer a potential buying opportunity. A rally and close above $6.30 after that would suggest a breakout and the pattern's technical measurement suggests a potential target of about $9.70 about three months after the breakout. Given the stock's volatile nature it is not suitable for conservative investors.

Speaking of market volatility, many new sector exchange traded funds (E.T.F.) have emerged over the past year offering investors the ability to use them as sector type insurance.

Take for example the financial sector. If your portfolio is weighted toward or underweight in financials you might consider protection or diversification through the use of a financial E.T.F. Jovian Capital Corporation and its related company, BetaPro Management Inc., launched products which deal with both the bull and bear sides of the financial sector. On March 4, the company launched a new Horizons BetaPro financial Exchange Traded Funds designed to provide daily investment results, before fees and expenses, which correspond to one time the daily performance of the S&P/TSX Capped Financials Index(TM). Since there is limited history to analyze the single E.T.F., I'll look at the Horizons BetaPro S&P/TSX Capped Financials(R) Bear Plus ETF [HFD-T]. The bear plus E.T.F. corresponds to two times (200%) the inverse (opposite) daily performance of the financial markets index. Investors should read the company's prospectus to familiarize themselves with the product and risk factors associated with any of the products before investing.

If you think there is continued risk in the financial sector, the bear E.T.F. may offer protection. It appears the share price has put in potential temporary bottom the week ending March 27. On a weekly basis the 90—week MA offered support at $26.75 and the week ended with a hammer bottom. The last week of the March started off with a gap up opening at about $31 and appears to be forming a morningstar candlestick pattern suggesting a bullish trend reversal for the bearish E.T.F. and signaling that the bullish surge in the financial sector from the recent bottom is temporarily halted. The theory is that you should trade in the direction of the gap. The daily RSI has turned positive and the MACD is trying to turn positive but the stock is at another resistance point so it bears watching. A close above about $33.80 would suggest a breakout with a potential rally to about $37.30. Alternatively, if the stock closes below $28.95 it would negate the positive trend and the stock could fall to the lower Bollinger band at about $24.70.

If on the other hand you think the financial sector has bottomed and declines should be bought then you may wish to look at the Horizons BetaPro S&P/TSX Capped Financials(R) Bull Plus ETF [HFU]. You might be a little earlier though as the chart has formed a weekly evening star candlestick over the past three weeks, suggesting further weakness. If the stock closes below the 10-week MA at $4.20 then it could drop to the lower weekly Bollinger band at about $3.10 where it would offer a buying opportunity. Notwithstanding the possible weakness the chart does appear to be forming a bottom. The MACD has issued a preliminary buy signal and the Bollinger bands are narrowing suggesting a potential trend change over the next few weeks. A close above $5.20 would suggest a trend change with a possible rally to about $6.60.

Yola Edwards is a contributing writer and technical analyst for Bell Globemedia Interactive, providing options and technical analysis research on a variety of North American equities.

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