Magic Software Enterprises
is an applications developer that sells its software through a private sales force, resellers, and original equipment manufacturers. It's a micro-cap stock sporting some huge growth and decent return on equity numbers.
So what do the charts tell us?
Let's start with the broad picture using a monthly chart to understand the long-term time frame.
Here we see the 2007 highs being attacked with volume expansion. From a long-term perspective, MGIC is
. Within that framework, we know that we want to trade the long side of this stock, not the short side.
We also can see that we have volume at the top on the monthly chart. That's a good thing for the bulls. It tells us that at some point in the future MGIC will work its way back up as that high will act as a magnet for prices.
On the weekly chart, we get a similar confirmed bullish picture.
With this time frame, we are able to start putting our trading parameters together. For example, look at the support zone that has set up from $2.30 to $2.50. Those large volume bars are anchors for price; they are the mainstay in choppy waters. They also demarcate the higher from the lower floor with respect to prices.
What does this mean to you? Well, if you want to buy MGIC, you want to buy it in that buy zone and you want to use the lower floor as your stop-out area just in case something goes wrong with this stock.
On the daily chart, we can see a slightly different story than what has been told so far.
That is why it is so critical to look at all time frames before you make the trade.
On this time frame, we see that the high volume spike from the weekly and monthly perspective was actually comprised of both a spike up and down. In other words, we got volume off the top. Volume off the top is not a good thing on the time frame with which it occurs. The fact that the pattern is this way on the daily chart definitely says that MGIC is going to be doing some backing and filling, which is already underway, for a while.
I would not be surprised to see it trade back into the breakout bar from March 9. The range on that bar was from $1.80 to $2.14. The highs on this time frame probably cap the current move though.
As you can see, the daily chart messes up the rosy bullish picture that had been drawn.
Until next week, just keep trading the charts!
Please note that due to factors including low market capitalization and/or insufficient public float, we consider MGIC to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
At the time of publication, Little had no positions in the stock mentioned, though positions can change at any time.
L.A. Little, author, professional trader and money manager, writes daily on
, a free educational site for traders and investors. He has been featured in numerous publications and is the author of
His background includes degrees in philosophy, computer science, computer information systems and telecommunications. With a trading philosophy centered on capital protection first and the accumulation of consistent gains over time, L.A. espouses a simplistic technical approach to trading the markets that is a throwback to the days of past. With a focus on swing points and the qualification of trends, L.A. provides a breath of fresh air to an otherwise crowded room of derivative indicators with the emphasis on technical minutiae.