FFIV Watch

F5 Networks Inc. (FFIV) has dropped below its 20-day high after repeated breakouts, and the relative strength index (rsi) shows a bearish divergence from the stock price.

sym	phase	trend	adx		200/50	40/10
FFIV

An rsi bearish divergence occurs when the index, while above the 70 mark, begins a downtrend as the stock price is rising, signalling a reversal.

FFIV has been climbing an uptrending channel since Oct. 4. The move carried the price from $70.21 to a high of $110.33 on Nov. 4, an increase of 57%.

The price has yet to close below the 20-day high following the most recent breakout, nor has it broken below the trend channel. Any bear play on FFIV at this point is an exercise in top-fishing rather than trend following.

FFIV gapped sharply downward on Nov. 1 after earnings were announced and then recovered to a fresh high on rumors, circulating on Nov. 3, of a positive announcement, which turned out to be (yawn) an increase in the price target to $105 by JP Morgan.

But we are chart people here, who close our ears to both the sirens' song of rumor and the incessant chatter of analysts.

The price is trading at about $107, two standard deviations from a 21-day linear regression line, meaning there's a 95% confidence that the price won't move significantly above that level.

A drop below $65 would bring it within one standard deviation, where there's a 68% chance that the price will remain at or below that level. And the linear regression line is around $80, near a three-week sideways correction in mid-October

But, calling reversals is a risky trade. The more conservative trade would be to wait for a break below the channel at around $100, or below the Nov. 1 gap-low of $97.71 before entering a bearish position. Either case would necessarily start a new, downward trend.

The alternative is to have a tight exit strategy. For my bear position, I'll get out if the rsi again moves above 70 (it's now at 65 and declining), which would break the rsi downtrend, or if the price moves sharply above the two standard deviations line, now at $109.

Looking at the fundamentals and financials, I'm moderately bullish on this maker of networking hardware and software, with its return on equity of around 22%, and also with its nearly non-existent debt.

And there's nothing wrong with opening a bear position on a sound stock. It increases confidence that the company won't be going bankrupt soon, and that's a good assurance to have when expecting a price decline.

Key

• phase: 20-day price channel phase, with green for bull trend, red for bear trend and yellow for neutral trend.
• trend: Price direction, green for higher highs and higher lows, red for lower highs and lower lows, yellow for sideways, and grey for neutral or ambiguous.
• adx: Average directional index location, indicating the strength, or the temperature, of the trend. Orange for 40 or greater, aqua (light blue) for 25 and up but below 40, magenta (light purple) for 20 and up but below 25, and brown for anything below 20. (Mnemonic: Orange for the overhead sun, blue for the surrounding sky, magenta for sunset on the horizon and brown for the earth.)
• 200/50: The moving average cross, green for the 50-day ma above the 200, red for below and yellow for closely aligned.
• 40/10: The moving average cross, green for the 10-day ma above the 40, red for below and yellow for closely aligned.

About my trading methods

Read a detailed explanation of my analysis method, including trading rules.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

The trader’s greatest sin is inaction. Sleeper, awake! Seize the Nietzchean moment. Roll out of bed and trade.