TA, JDSU, QCOM, trendlines and channels.
Several people have asked me for more charts on trendlines. A lot of this is relevant to JDSU only as it shows why JDSU and QCOM are dangerously high priced right now. If you're not interested in Technical Analysis please skip this and subsequent posts. I expect this is going to take me more than one screen. [Stand back everybody. Give him room!]
Note: I advise you to open a second browser window to look at these charts while reading my commentary. You can do this by right-clicking on the link and selecting Open in New Window.
First, I want to show you why I pay attention to trendlines.
white-crane.com shows my chart of Sartek.
On 10/20/99 SRT hit a high of $69 per share, and was at the top of its channel. This was the time to buy protective puts or even sell the stock. The odds were that it would return to the 26-day Moving Average (MA). Buying put there would have saved you at least 32% of your investment, as three days later SRT was at the bottom of the channel at $47 per share. Worse yet, it then fell out of the channel and is now trading at $35 and still going down.
A channel represents what the market thinks the stock is worth. The support line at the bottom is where lots of buyers think the stock is cheap, and the resistance line at the top is where lots of owners (and short sellers) think the stock is over-priced. There's nothing magical about it -- it's just herd mentality. The stock price overshoots in both directions.
Channels can trend up, down, or sideways. An up-trending channel usually means that the company's prospects are looking better, and more buyers are realizing it. The channels themselves also overshoot in both directions. A good, strong up-trend channel will take the stock price well above any reasonable level. When there are no more buyers to recruit, and the selling pressure becomes great enough, the stock will break the channel. This is often triggered by bad news (such as earnings). The stock then has a long way to fall.
The entire point of channel analysis is to get you into up-trending stocks at good prices, and to get you out of them when they fall off the trendline.
Please look again at the 50% loss in SRT. At the peak of $69, on the edge of the precipice, everyone was euphoric. Investor's Business Daily wrote about the company. The Champagne corks were popping. This could happen to you.
OK. I'm going to break this message here, and go on to the next page. |
