Mellanox Technologies, Ltd., a fabless semiconductor company, produces and supplies semiconductor interconnect products for computing, storage, and communications applications in the high-performance computing, Web 2.0, storage, financial services, database, cloud, and embedded markets. Its connectivity products facilitate data transmission between servers, storage systems, communications infrastructure equipment, and other embedded systems. The company provides solutions based on InfiniBand, including switch and gateway integrated circuits (ICs), adapter cards, cables, modules, and software, as well as switch, gateway, and long-haul systems.
Please take a look at the 1-year chart of MLNX (Mellanox Technologies, Ltd.) below with my added notations:
MLNX has trended consistently lower since March and the finally bottomed in November. Over the last five months the stock seems to have formed an inverse head and shoulders pattern (purple). I have noted the head (H) and the shoulders (s) to make the pattern more visible. MLNX’s neckline resistance was at the $42.50 level (blue) and the stock confirmed it’s H&S pattern when it broke up through that $42.50 neckline. MLNX should be moving higher overall from there.
Lastly, keep in mind that simple is usually better. Had I never pointed out this inverse H&S pattern, one would still think this stock is moving higher simply if it broke through the $42.50 resistance level. In short, whether you noticed the pattern or not, the trade would still be the same: On the break above the key $42.50 level.
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The Tale of the Tape: MLNX has confirmed an inverse head & shoulders pattern. A long trade could be entered on a pullback near the $42.50 level with a stop placed under that level. A break back below $42.50 could negate the forecast for a move higher.
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
Follow me on Twitter: @cmtstockcoach