Sunday, March 9, 2014

BRCD: An unconvincing bull signal

Brocade Communications Systems Inc. (BRCD), a supplier of network equipment, was one of the charts left over from Thursday's second-round analysis. It gave a bull signal on Wednesday, breaking above its 20-day price channel.

The bull signal lacks conviction. BRCD is in the final stages of its rise from Feb. 5 and nearing a correction of the rise from Oct. 24, 2013. It has some upside potential, but not enough to make a trade worthwhile.

The Chart

There is very little ambiguity about BRCD's chart. My Elliott wave analysis puts it in wave 4 {-5} of 5 {-4} of 5 {-3} of 3 {-2} of 5 {-1} of 3 of 3 {+1}.

A confusing string a curly brackets. The point to focus on is all of the 5th waves at the lower degrees. That means a reversal is quite near.

Click on chart to enlarge.
BRCD 1 year daily bars (left), 30 days hourly bars (right)
At a degree higher than the 5ths, the analysis shows BRCD to be completing wave 3 {-2}, which began Oct. 24, 2013. 

A typical correction of that rise would bring the price down considerably. It would stop short of the wave 3 {-2} beginning at $7.66, but a correction that halts above that level could cause considerable damage to a position.

Corrections often stop at the major Fibonacci retracement levels. For BRCD, these are:


Prior to the correction of the rise from October, I expect BRCD to complete wave 5 {-5} to the upside, breaking above $10.29 after it completes the present wave 4 {-5} triangle. The magnitude of the move will, in my opinion, be too small to trade.

Decision for My Account

I won't be opening a bull position in BRCD because the upside potential is insufficient to make it worthwhile.


My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.

By preference I place my trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.

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.

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