The stock market has had a great week or two and most stocks are moving higher. However, there are a few stocks still maintaining an overall trend lower. In addition, there are some stocks that have actually hit 52-week lows. Stocks that have broken lower in the face of the current market rally, and are at 52-week lows, could be the ones that drop the most when the market eventually does move lower.
When it comes to trading a stock hitting a 52-week low, I prefer to look for ones hitting a “NEW” low. As with stocks hitting new 52-week highs, to me a stock hitting a new low would be a one that hasn’t hit a new 52-week low in quite some time. In addition, and more importantly, I want the stock to have broken through a key area of support. One such stock that fits that description would be that of Broadcom Corporation.
Broadcom Corporation is a provider of semiconductor for wired and wireless communications. Broadcom products enable the delivery of voice, video, data and multimedia to and throughout the home, the office and the mobile environment. The company provides a range of system-on-a-chip and software solutions to manufacturers of computing and networking equipment, digital entertainment and broadband access products, and mobile devices. Its product portfolio includes broadband communications, mobile and wireless, and infrastructure and networking.
To review Broadcom’s stock, please take a look at the 1-year chart of BRCM (Broadcom Corporation) below with my added notations:
As you can see, BRCM has been in an overall sideways move since June. Meanwhile, that stock has held a clear support level at $31 (green). Even though the market has caused most stocks to move higher, BRCM has broken below $31, which was breaking to both a new 52-week low and through a clearly defined support level. Last week and into this week, BRCM has rallied back up to the $31 and is currently testing it as new resistance (red).
The Tale of the Tape: BRCM had formed a key support level of $31, which was a 52-week low breakdown when the stock broke below it. This should signal lower prices ahead for the stock. A short trade could be entered on BRCM now or if the stock pulls back up to $31, with a stop set above that level.
Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.
No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!
Christian Tharp, CMT