How to Profit From Ambarella's Volatility

Shares of Ambarella (AMBA) are up 5% year-to-date, outperforming the S&P 500 and in line with the performance of the Technology Select Sector SPDR Fund  (XLK)  -- but it has been a highly volatile year for the chip supplier for GoPro (GPRO) and other video camera manufacturers.

Ambarella broke out of a horizontal channel in March and then soared 158% into the middle of the year, only to reverse sharply and drop 62% in value, taking it back to where it began the year. It's been trading in another horizontal channel since October, identical to one it broke out of in March. Price action in the second half of 2015 has been a mirror image of the price action in the first half of the year, and it has been a wild ride.

The recent channel consolidation and improving technical indications, however, have set up a trading opportunity that would profit from another period of volatility.

Daily moving average convergence/divergence is overlaid on a weekly histogram of the oscillator and on both timeframes is tracking higher in bullish divergence to price. Stochastics have made incrementally higher lows and moved above their oversold level. Chaikin money flow is still in negative territory but has moved above its 21-period signal average, and the money flow index, a volume-weighted relative strength measure, is above its centerline, signs of nascent buying interest at these levels.

Amberella is once again testing the lower end of the trading channel, a level that acted as support earlier in the year, and the stock offers a good risk/reward long entry point at its current level, utilizing a percentage stop under nearby support. There is a 44% short interest in the stock, which, combined with the potential for volatility associated with the price compression, could initiate a powerful breakout rally.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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