There have been questions about my decision to short BRCM on Friday. I hope this will explain why I decided to short it.
Some of well known trading rules:
1. In a strong market, buy the strong stocks and in a weak market short the weak ones.
2. When the market shows signs of reversal, short those stocks which have been weak in a previously uptrending markets.
3. Trade with trend.
Here are four charts that explain the scenario.
ttrader.com
As the top two charts show, while the broader markets (SP, NASDAQ and DOW, with others) trended strongly up from August, Semi sector lagged them. Therefore it was a weak sector. In SOX, BRCM was one of the weakest stocks as seen by relative strength. I had posted that previously. TXN was one of the strongest in the sector.
Further, on daily and weekly charts BRCM has made a small triangle. These symmetrical triangles which show a height of about 10-15% of the larger move are commonly continuation patterns, and NOT reversal patterns. The picture becomes quite more clear on weekly chart, the third one. This triangle is more likely to break down than break on upside. BRCM also failed at significant resistance - 50 DMA and gap. As a matter of fact, SMH made an island reversal.
SP clearly made a reversal stick on Thursday - an almost bearish engulfing stick. DOW had a more clear bearish engulfing stick, thus suggesting coming market reversal. Follow through on Friday confirmed at least a short term trend reversal from up to down.
In such a market shorting one of the weaklings made sense to me. EBAY has been the leader in this move from August. As seen in the 4th chart, EBAY has actually led the markets. I had sold most of my EBAY on Thursday and the rest got stopped out on Friday. When the broader markets bottom and turn up, the first one I will be buying will be EBAY.
Now, one can count waves ad infinium. However I believe that the waves should be considered as adjunct to patterns. My trading is based on the waves and patterns, not only on the waves. Be that as it may, the following chart shows a type I sell signal for BRCM setting up. I am just a little ahead of the signal.
ttrader.com
I am sure, the members on this board will have comments. I'd welcome discussion.
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