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 Cavium, Inc.
Cavium, Inc. designs, develops and markets semiconductor processors for intelligent and secure networks. Cavium is a provider of integrated semiconductor processors, which enable processing for networking, communications, storage, wireless, security, video and connected home and office applications. Its products are used in a of networking equipment, including routers, switches, content-aware switches, unified threat management and triple-play, gateways, wireless local area network, and third generation/fourth generation Worldwide Interoperability for Microwave Access, Inc./long term evolution access, Internet protocol surveillance systems, video conferencing systems and connected home and office equipment. The company operates in two segments: semiconductor products, and software and services.
To review Cavium’s stock, please take a look at the 1-year chart of CAVM (Cavium, Inc.) below with my added notations:
CAVM has been in an overall sideways move since last summer. Meanwhile, the stock has held a clear level of support at $25 (black). Even though the market has caused most stocks to move higher over the last 7-8 months, CAVM has not been able to follow along and has recently broken below $25. This breakdown is both a new 52-week low and a break of a clearly defined support level. This past week CAVM has been testing the $25 level as new resistance.
The Tale of the Tape: CAVM had formed a key support level of $25, 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 CAVM now or if the stock pulls back up to $25, with a stop set above that level. A break back above $25 would negate the forecast for a move lower and a long position could be considered.
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