, a digital-media processing company, has held its 2006 gains very well. The stock's climb last year from under $10 to above $30 was a nice move for the company stock and its shareholders. But over the past six months, although the price of the stock has been volatile within a higher range, the technical picture shows a pattern forming that usually leads to a strong price break in either direction.
This narrowing-range formation typically acts like a springboard. Most of the energy between the bears and bulls is tied up in a great struggle as each side fights to control the intraday and short-term picture.
On the chart below, you can see that volume in Sigma has remained fairly constant. That means there is still a lot of interest in this stock as each side tries to gain control. Think of a narrowing-range formation as a coiling effect or a dam. When the coil is pressed as tight as it can go, or the dam is holding as much water as it can, releasing the pressure leads to a huge initial explosion.
Price behavior can behave in much the same way. In this case, as price volatility begins to narrow, the energy is being built up. Once one side outweighs the other, price could move rapidly in either direction. If this type of explosion happens, there's a strong possibility of missing the entry point as price moves past the trigger level.
So keeping that in mind, I want to propose a bearish setup for Sigma in the event the stock's explosion is downward.
The entry strategy for this trade would be to see a close under $24.75. Then let the price move back up to $24.75 and take entry there. The stop would be placed at $27.00, which would offer $2.25 in risk.
The first target would be just under the first former support level at $22.50. Partial profits could be taken there. The final target would be placed at the second former support of $20 a share.
Sigma Designs (SIGM) -- Daily
If Sigma's share price moves above $26.50 without offering an entry first, this trade is no longer valid. Also, if the price moves under $24.40 without first offering the entry, the trade setup is no longer valid.
Shares closed at $25.96 Monday.
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on the watch list. If the price hits the $18.50 entry, the stop would be set at $20.10. The first profit would be placed at $16.90, with a final profit target at $12.75.
If the price closes under $15 without first offering an entry, this trade setup is no longer valid.
did not set up last week. The
ideal setup for this stock would be to see the range form between $8 and $9.40. If the price of the stock remains under $9.40 and breaks $8 support, the entry should be taken at $8 on a return to that price level. The stop would be $9. The profit target would be placed at the $7 support that formed in January and February 2007.
If the share price breaks $9.40 before offering an entry, this trade setup is no longer valid.
also did not set up last week. The
suggested entry for this trade is at $21.50, with a stop at $23.50. The first profit target would be $18, where partial profits could be taken. The final profit target is $15.50.
If the price of the stock moves under $18.75 without first offering an entry, this trade setup is no longer valid.
At the time of publication, Schumacher had no positions in stocks mentioned, although holdings can change at any time.
Chris Schumacher is a financial trader, speaker, writer and co-author of
Techniques of Tape Reading
. While Schumacher cannot offer specific investment or trading advice, he appreciates your feedback;
to send him an email.