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Chart of the Week - May 12, 2008

 Manila Electric Company (MER)

MER Monthly Chart - Bullishly Consolidating at its Highs

charts are courtesy of Metastock

MER Weekly Chart - Testing Support 

charts are courtesy of Metastock

MER Daily Chart - Island Reversal coupled with Hammer Pattern is Bullish 

charts are courtesy of Metastock

Legend: blue lines - range for Tsupiteros

            dotted blue lines - range for Position Traders

            red lines - important trend lines

Manila Electric Company experienced some extraordinary volatility last week as the government has threatened to take over the company from the Lopezes. With foreign funds being spooked by this development, the stock dropped like a brick from 81.00 just last, last Friday to a low of 64.00 last Thursday. It managed to climb up a bit last Friday though and was able to close the week at 71.00. Could this be the end for this stock and prices will most start to trend down from here? Or, could this development actually be an opportunity to buy the stock low?

Let's start from the big picture, its weekly and monthly charts. From a low of 11.36 (adjusted for dividends) last Mar 2006, the stock has managed to climb all the way up to 105.45 last July 2007. From that time on, the stock began consolidating between 66.50 and 90.00, going up and down between that range for several times. From a long-term point of view, I would tend to think that the stock is merely resting (between 66.50 and 90.00) before it continues to trend higher. A break above the 90.00 level should start a new upswing bringing the stock all the way up to 200.00, if not higher. Only a break below the 66.50 level would change my point of view on the stock.  A break below the 66.50 level would indicate to me that its uptrend, which started all the way from mid-2003, has already ended. Therefore, with the stock still holding above that 66.50 level up to now, that long-term target of 200.00 is still intact unless proven otherwise by the market.

In the short-term, I bet some holders of MER got quite a scare last week as prices actually dropped below its support at 66.50. With foreign funds aggressively selling the stock even below the 66.50 level, I was already thinking during that time that prices was going to break below that major support level and start to trend down. The stock dropped to as low as 64.00 last Thursday but managed to close the day still above the 66.50 level, thus, forming a possible bear-trap. With the stock gapping up the next day and failing to drop below its previous close at 67.50, I already knew prices would most likely reverse back up from then on. The fact that prices closed the day with another bullish hammer last Friday and closing at its highs, the momentum of the stock in the short-term has certainly turned back up once again. Take note of the bullish island reversal pattern that formed.

What can we expect of the stock in the next coming days ahead? With momentum in the short-term now back with the bulls, I would tend to expect prices to test its resistance at 75.00 in the next couple of days. However, I'm not so sure if prices can break above that level within this run. I would tend to expect prices to consolidate within this 64.00 to 75.00 for the meantime. After what had happened to the prices this week, I would bet that some people who are currently stuck at higher prices would probably want to get out once prices reaches their costs.

Tsupiteros, who currently have positions in this stock, may want to take profits as close to 75.00 as possible. For those who would like to buy this stock, I would recommend to buy it as long as prices continue to hold above the 68.00 level. For position-traders, you may want to buy as close to 68.00 as possible and just place mental stops on the break below last Thursday's low at 64.00.

Just remember, the stock will continue to remain bullish in the long-term as long as prices hold above last Thursday's low at 64.00. If prices suddenly drop below 64.00 anytime soon, that would already be the signal to everyone to immediately get out of the stock. For the meantime, I would just treat last week's bruhaha as nothing more than just market noise. In my view, the long-term trend is still intact and I will continue to expect higher prices from here on.

Notes:

Short-term Traders/Tsupiteros vs. Medium-term/Position Traders: Recommendation for short-term traders or Tsupiteros are meant to be used by traders whose holding period are limited to one day to two weeks. Medium-term or position traders are meant to be used by traders whose holding period are two weeks to three months. Long-term investors whose holding period is more than three months should not follow these recommendations.