Broadcom Slumps Below Its December 2018 Low - How to Trade It

Broadcom has been in crash mode since setting its all-time intraday high in January.
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Broadcom  (AVGO) - Get Report missed analysts' earnings estimates and stopped offering full-year guidance. It blamed the coronavirus. 

The stock has been in crash mode since setting its all-time intraday high of $331.58 on Jan. 24. The decline to its Dec. 16, 2018 of $217.61 was a bear market decline of 34%. 

The stock opened higher Friday at $225.50, then by 10 a.m. ET traded as low as $203.50. Looking back on the weekly chart you see a low of $197.46 set during the week of July 13, 2018. The stock is trading below its weekly pivot for next week at $218.46.

In missing earnings-per-share estimates after the close on Thursday, the company ended a long winning streak of 29 consecutive quarters of beating these estimates. 

The company could not offer full-year guidance given the uncertainty of demand for semiconductors. Here’s are the details as posted by TheStreet.

The stock opened Friday at $225.50 down 28.6% year to date. This puts the stock in bear market territory 32% below its all-time intraday high of $331.58 set on Jan. 24. This high was shy of its annual risky level for 2020 at $337.86.

A fundamental backdrop for the stock is favorable. Its p/e multiple is 14.16 with a generous dividend yield of 5.29%, according to Macrotrends.

The Daily Chart for Broadcom

Daily Chart For Broadcom

Daily Chart For Broadcom

Courtesy of Refinitiv XENITH

The daily chart for Broadcom shows that the stock has followed its 200-day simple moving average higher from January 2019 through October. 

Then came the crash! The 200-day SMA failed to hold on Feb. 25. This was the day when the stock fell below its quarterly pivot at $293.32 which is now a risky level.

The horizontal line alone the bottom of the chart is the December 2018 low and its weekly pivot for next week at $218.46. This should be a magnet as the stock rises from its morning low of $203.50.

The Weekly Chart for Broadcom

Weekly Chart For Broardcom

Weekly Chart For Broardcom

Courtesy of Refinitiv XENITH

The weekly chart for Broadcom is negative with the stock below its five-week modified moving average at $280.45. 

This week the stock broke below its 200-week simple moving average or “reversion to the mean” at $242.28. This is the first time that the stock has been below this key moving average.

The 12x3x3 weekly slow stochastic reading is projected to fall to 25.45 this week down from 32.48 on March 6.

Back during the week of April 19, 2019 this reading was above 90.00 at 92.06. This made the stock in an “inflating parabolic bubble” formation. During this week the stock traded as high as $322.44. This warning favored an investment strategy to “sell on strength.

Trading Strategy: Buy weakness to key chart levels at $203.50 and $197.46 and reduce holdings on strength to the quarterly risky level at $293.32. 

How to use my value levels and risky levels:

The closes on Dec. 31, 2019 were inputs to my proprietary analytics. Quarterly, semiannual and annual levels remain on the charts. Each uses the last nine closes in these time horizons.

Monthly levels for March were established based upon the February 28 closes.

New weekly levels are calculated after the end of each week.

New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.

To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.

A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months.

A reading below 10.00 is considered as being “too cheap to ignore” which typically is followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.