Broadcom (AVGO - Get Report) remains a popular momentum stock as it reports quarterly earnings after the closing bell on Thurs., Sept. 12. My call is to buy the stock on weakness to its quarterly pivot at $290.32. A fundamental reason to do so is that the stock has a P/E ratio of 15.94 and offers a dividend yield of 3.60%, according to Macrotrends.
The stock closed Wednesday at $298.01, up 17.2% year to date and in bull market territory, 43.1% above its Oct. 29 low of $208.23. The stock set its all-time intraday high of $323.20 on May 1 and is 7.8% below the high.
The daily chart shows Broadcom above a "golden cross" that was confirmed on Jan. 1 when the stock closed at $236.07. This signal led the rally to its all-time intraday high. The weekly chart was upgraded to positive on Sept. 6, which favors a positive reaction to earnings.
Broadcom reports quarterly results after the closing bell on Thurs., Sept. 12 and analysts expect the semiconductor giant to earn between $5.13 and $5.30 per share. The company makes chips for the wireless and broadband communication industry. There are 33 Wall Street analysts covering this stock and 22 have buy ratings and 11 have hold ratings. The resumptions of the trade talks in China should be a floor under the stock but a trade stalemate could hurt it. The stock has been strong because it provides chips for Apple (AAPL - Get Report) , which has been a strong stock this week. Broadcom will benefit from the global roll-out of 5G wireless networks.
The Daily Chart for Broadcom
Courtesy of Refinitiv XENITH
The daily chart for Broadcom shows that the stock has been above a "golden cross" since Jan. 8 when the 50-day simple moving average rose above the 200-day simple moving average, indicating that higher prices would follow. The stock could have been bought that day at the 200-day then at $235.42. The stock closed Dec. 31 at $254.28, which was an important input into my proprietary analytics. Its annual pivot for 2019 is $260.78, which provided buying opportunities on March 8, May 23 and June 14. Its quarterly pivot at $290.32 has been a magnet between July 15 and Sept. 10. The latest test was a pre-earnings buying opportunity. Monthly and semiannual risky levels are $314.05 and $320.38, respectively.
The Weekly Chart for Broadcom
Courtesy of Refinitiv XENITH
The weekly chart for Broadcom is positive, with the stock above its five-week modified moving average of $286.04. The stock is well above its 200-week simple moving average or "reversion to the mean" at $221.74. The 12x3x3 weekly slow stochastic reading is projected to rise to 56.11 this week up from 49.32 on Sept. 6. decline to 33.98 this week down from 37.56 on June 7. At the May 1 high, this reading was 91.86 above the 90.00 threshold as an "inflating parabolic bubble." This warning resulted in a decline of 22.6% to the May 28 low of $250.09, with the buying opportunity at the annual pivot at $260.78.
Trading Strategy: Buy weakness to the quarterly and annual pivots at $290.32 and $160.78, respectively, and reduce holdings on strength to monthly and semiannual risky levels at $314.05 and $320.38, respectively.
How to use my value levels and risky levels:
Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play.
The weekly level changes each week. The monthly level changes at the end of each month, the latest on Aug. 30. The quarterly level was changed at the end of June.
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. Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble" as a bubble always pops. I also call a reading below 10.00 as being "too cheap to ignore."