Nuance Communications Inc. (NUAN), which makes voice systems (think of your last call to customer service), is showing a bearish divergence on the relative strength index (rsi) that, if it is to be believed, signals an end to a rise that carried the stock up 61% since Sept. 12.
NUAN began its rise at $16.75 and peaked at $26.97 on Oct. 27. Since then it has traced a seven-day zig-zag that has failed to produce a new breakout above the 20-day high.
An rsi divergence occurs when the index, while above 70, moves into a downtrend while the stock continues to rise. The rsi peaked on Oct. 24.
The rise from Sept. brought the stock to two standard deviations above a 21-day (one month) linear regression line. At that level, there's a 95% chance that the stock will move no higher.
The price also showed a significant decline in volume even as the price was peaking, and that drop-off has continued since then.
The price remains well within its uptrending channel. A bear position at this point is a reversal play, a tactic that carries greater risk.
A conservative strategy would be to wait for, at the least, a breakdown below the low of the post-high zig-zag, at $25.11. That would signal the beginning of a downtrend. A break below the uptrending channel -- now at around $21.60 but rising rapidly -- would give an even stronger signal that a new downtrend was in force.
The one standard deviation line is at about $24, a level that has a 68% chance of marking the top of the price range.
I'll exit my bear position on NUAN if the rsi moves above 68, breaking the downtrend, or if the price moves above the two standard deviations line, now at about $26.50.
Looking at the NUAN financials and consensus, I'm mildly (but not wildly) bullish on the stock. One demerit is the return on equity, a mere 6%. But the company carries no debt to speak of, and that's a big plus in my book.
- 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.
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.