Harold,
Before I answer your questions, I think a few general comments about how I feel about technical analysis are in order.
First and foremost, I don't think anybody can forecast stock prices. As I have said before, the price of a stock is based on supply and demand at every price point and nobody, unless they have supernatural psychic powers, can predict whether humans will buy or sell a stock at every price it trades at.
Second, I believe that technical analysis should be used to reduce risk and to increase one's probability of making profitable trades rather than to forecast prices. I base risk on support levels and targets on resistance levels. There is no guarantee that a support level will hold or that a stock will trade up to resistance. I can't tell you exactly what percentage of the time support levels hold, but I would venture to guess it's more than 70%. The good news is that no matter what the percentage is, my experience tells me that it's enough to make money in the market. TA is really just a statistical approach to investing that increases your odds of making money; it doesn't guarantee it.
Third, you don't have to pick the absolute bottom in a stock to make money. If you can pick just 50% of the trading range, you will make a lot of money. For example, let's say that a stock has a trading range of 16 to 24 and you buy it at 18 and sell it at 22. You made $4 per share in an $8 range, which is only 50% of the trading range, but your profit is 22% (4/18). This is just a hypothetical case but it demonstrates my point. Obviously this is not a style for day traders who try to scalp eighths and quarters and take the loss when they get an eighth or a quarter behind. I day trade some, but it is a very small percentage of my overall strategy.
So with that backdrop, where do I see VLSI trading? I think it is likely that the stock will trade in a range of 16 to 25 over the next few months and it is highly probable that 17 1/4 is the lowest we will see for a while. Notice that I said "probable". Again, I don't think anybody can forecast stock prices. There's a difference between saying I think it is highly probable that 17 1/4 is the low and saying it definitely won't trade below that. I have listed below the reasons why I think VLSI is near a bottom.
1. The stochastic and ultimate oscillator did not confirm the low at 17 1/4 and set up a bullish divergence.
2. The relative strength index reached a low of 10 yesterday although the stock did not make a low below 17 1/4. Not only is this a bullish divergence, but it also indicates that the stock is extremely oversold.
3. The stochastic oscillator gave a buy signal on March 13 and it is still on a buy signal.
4. There is a lot of bearish sentiment surrounding this stock that can be seen not only by reading this board, but also in the ratio of puts to calls. Because people hedge long stock positions by selling covered calls, there are normally more calls open than puts and it is highly unusual for there to be more puts open than calls as is the case right now with VLSI.
5. The stock has a lot of chart support near the current price although it needs to close above 18 1/4 to turn the trend around.
6. The cumulative money flow over the past 15 trading days has been positive, indicating accumulation of the stock. This goes back to February 27 when the stock tanked on the earnings warning. Conversely, the money flow in the 15 days prior to the earnings warning was decidedly negative.
7. The lower daily bollinger band turned up today for the first time since the stock tanked on February 27. I place a lot of importance on bollinger bands and think it is very positive that the lower band turned up today.
Finally, while I don't think one can forecast stock prices, I do think that the odds of something happening become greater if something else happens. Specifically in the case of VLSI, if the stock closes above 18 1/4, I think the odds are very high that it will trade up to 19 1/2. On the other hand, if it closes below 17 1/4, the odds are high that it will trade down to 16.
You asked what my target is: At the present time, my target is 22.
You also asked what I think VLSI will do if the market corrects 10%. I'm afraid I don't want to take a stab at that. While there is a correlation between individual stocks and the market over a long period of time, I don't think there is much of a correlation over a day or week. That's why I don't worry too much about what the indexes are doing and instead focus on the charts of the stocks that I'm trading.
To sum up my opinion, I think we are in the lower end of the probable trading range and I would buy the stock right now. If you think it might go down to 16, then possibly you should take half a position now and buy the other half if it goes down. While there's no way to say for sure if the stock will trade below 17 1/4, I do feel very confident that you will make money buying VLSI at today's price (17 5/8).
Dan |
