Sunday, July 30, 2000

PMC Sierra - PMCS

This stock has been one of the stocks recently that has broken out on heavy volume, only to breakdown almost immediately.

The stock had formed a double bottom formation with a handle. The volume during the double bottom formation had acted well. The volume was heavy on the first sell off, then was heavy, but not as heavy as the first sell off, on the second sell off, and the volume in the handle dried up, before the stock broke out on heavy volume.

As is usually common, volatile stocks such as PMCS typically follow the path of the market, and began selling off about two weeks ago, rendering the breakout a failure. But there is short term hope on the horizon.

The stock, as well as the market, are extremely oversold at this point and are due for a technical bounce, also know as a 'dead cat bounce'. The stock is also approaching a critical support line that has dated back to the end of 1998. It has bounced off this support several times, and looks as if it is about to find support there again. One clue I find interesting is that the stock only sold off moderately on Friday as the NASDAQ had its biggest point loss in some time, meaning the selling pressure is moderating.

It would be risky to try and buy the stock before testing the support level, as a dead cat bounce is not guaranteed. Look to enter the stock at around 172, but watch the market on whether or not to reconsider the buy decision. If the market isn't reversing to go higher, avoid the stock, until the market reverses direction to the upside.

If you do enter the trade on the long side, don't overstay your welcome with greed. The stock may try and bounce to the $200 level. Volume will be crucial. If it is declining during the recovery, then your sell signal will be the day the stock undercuts the prior days low. This would be a good point for the high risk trader to initiate a short position.

Remember: 7% stop losses from your buy point on all trades, or whatever you're comfortable with. Preserve your capital, and you will live to fight another day. Lose it, and back to mutual funds you go.
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