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Sterling Weekly for August 22nd, 2005

Well last week turned out to be a little busier than I anticipated, and as a result I did not get a chance to find the chart on the price of oil I was looking for. However I have been looking at a chart of Ebay, Inc. 'EBAY' every night in my review of the charts from the day's trading activity. The chart on Ebay has been begging for my attention. While Ebay has in the past proven to be a difficult stock for me to trade personally, it is developing what I believe is a pretty clear chart pattern, sometimes referred to as an "Island" pattern, with a predictable move to the downside.

I have included a chart on Ebay below, and I would like to direct your attention to mid July when the shares of Ebay suddenly gapped higher on heavier volume, rising to a high just under $50/share before trending back lower. This is normally a very bearish chart pattern, so let's take a look at the numbers because the chart indicates that if we see a downward gap open in the shares of Ebay, then they are going to trade under $30/share in the near future.

The shares of 'EBAY' closed July 20th at $34.87/share, and opened on July 21st at $39.89/share. Over the course of the next few days the shares of Ebay rose to a high of $44.98/share. Well the rule of thumb is that the downside price target will be somewhere between the distance from the closing price on the 20th to the distance of the gap open price to the short term high. This produces a target range of $24.76-$29.85/share.

As I said earlier Ebay itself has been a difficult stock for me to trade, so I don't think I would open an outright short position in the shares of Ebay. But I do think I would create an Debit Put Spread using the October puts. Currently the October $32.50 puts are quoted at $0.30 by $0.35, and the October $27.50 Puts are quoted at $0.05 by $0.15/contract. I would would buy the October $32.50 puts and sell the October $27.50 puts. This would end up costing a net $0.30/contract, reducing my exposure. However it does limit my potential profit to the difference between the strike prices of the 2 contract. So my potential profit is limited to $5.00/share on Ebay.

Just my thoughts on where the shares of Ebay could end up going to in the next few weeks. Stay tuned, and I'll be sure to let you know how it all works out.

Sterling Calendars for the Week of August 22nd, 2005
Economic Calendar
Date Est. Time Release For

Briefing.com

Consensus Prior
8/23 10:00am Existing Home Sales Jul 7.25M 7.25M 7.33M
8/24 8:30am Durable Orders Jul (3.5%) (1.2%) 2.8%
8/24 10:00am New Home Sales Jul 1,350K 1,325K 1,374K
8/25 8:30am Initial Claims 8/20 310K 314K 316K
8/25 10:00am Help Wanted Index Jul 39 38 38
8/26 9:45am Mich-Sentiment-Rev. Aug. 92.7 92.7 9.27

  Misc. Calendar
Date: Comments:
8/22 HJ Heinz 'HNZ' reports earnings before the open. est. $0.49
8/23 Williams-Sonoma 'WSM' reports earnings before the open. est. $0.25
8/23 Wind River Systems 'WIND' reports earnings, time unknown, est. $0.06
8/24 Intuit 'INTU' reports earnings after the close. est. ($0.10)
8/24 Petsmart reports earnings after the close. est. $0.22
8/24 Tivo, Inc. 'TIVO' reports earnings after the close. est. ($0.04)
8/25 Toll Brothers 'TOL' reports earnings. Time unknown. est. $1.19
8/26 WPP Group 'WPPGY' reports earnings. Time unknown. $1.38

Prime Update:

Sterling Investment Services is an investment research and money management firm publishing the Prime Stock Newsletter. The Prime Stock Newsletter is a daily comprehensive newsletter that is useful for investors and traders alike. Whether you are looking for short term trading opportunities ranging from day trading to a couple of weeks or if you looking to acquire a long term portfolio at smart entry points. Subscriptions are $50/month. A Free 2 Week Trial is currently being offered.

Highlights from Recent editions of the Prime Stock Newsletter
Recommendation Date Entry Point Recent Close or Exit Price Profit* Note
BCE, Inc. 'BCE' Aug 5 $25.00/share $25.95 intra day high on Aug 11th. $0.95  
United Health 'UNH' shorted Aug 8 $52.06 $51.02 intra day low on Aug. 9th $12.7  
Massey Energy 'MEE'

Aug 10

$46.46 $49.45 intra-day high on Aug 22nd $2.99 Should move higher.
* The per share PROFIT is a theoretical calculation based upon the opening price the day the recommendation is published and the intra day high (or low for short sales) on the exit day. The exit day is determined based upon the application of our "Rules for Trading", the implementation of "stops" within our stated policy, and may not reflect the complete or full movement of the underlying recommendation.

Dow Jones Industrial Average (INDU)

Current Opinion: Closed @ 10,600.31 Last Signal: Called Lower on August 5th with the previous day's close of 10,0610.10 Current Expectations: I am expecting the Dow Jones Industrial Average to pullback over the short term and move lower and test 10,546.32 If the Dow closes below this level then it should continue to move lower and test 10,432.51

The S&P 500

Current Opinion: Closed @ 1,230.39 Last Signal: Called Lower on August 5th with the previous day's close of 1,235.86 Current Expectation: I am expecting the S&P 500 to to pullback over the short term and test 1,225.31 and then 1,2166.96 if the support at 1,225.31 fails to hold.

The NASDAQ 100 (NDX)

Current Opinion: Closed @ 1,591.75 Last Signal: Called Lower on August 5th with the previous day's close of 1,608.74 Current Expectations: I am expecting the NDX to pullback over the short term and test 1,568.96

CBOE Ten Year Treasury Index (TNX)

Current Opinion: Closed @ 4.238% Last Signal: Called Lower on August 15th with the previous day's close of 4.238% Current Expectations: The TNX should move lower and test 4.196% and then 4.177% on a closing basis.

Disclaimer: The Sterling Investments series of newsletters is produced by Sterling Investment Services, Inc. All information used in the production has been obtained from sources believed to be reliable and accurate. Sterling Investment Services does not warrant or assume any liability for inaccuracy of the information used to produce our publications. To receive further information on these services please visit our web page at: www.sterlinginvestments.com If you would like to contact us our fax # is (404)-816-8830 Email address is: enelson@sterlinginvestments.com Sterling Investment Services may hold positions in the securities recommended or may be providing consulting services to the companies mentioned within this report.
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