Cavium Looking Sharp

 | May 05, 2014 | 8:35 AM EDT  | Comments
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Stock quotes in this article:

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Despite the lackluster action in many stocks, some are still showing decent bullish patterns. Cavium (CAVM), a semiconductor name, is one of those.

What I especially like about Cavium is that, on April 28, it pretty much double-bottomed into a key Fibonacci price cluster of support between $39.49 and $40.19. Its price is also currently above the 200- and 50-day simple moving averages. Finally, the five-day exponential moving average is above the 13-day EMA -- something that also supports a bullish outlook.

Cavium (CAVM) -- Daily
Source: Dynamic Trader

For this stock, the play we are actually looking at is a secondary entry on its current pullback. That correction looks appetizing, seeing as the stock embarked on it after taking out a key prior swing high from April 24.

If the April 28 low is truly important in the bigger picture, the stock should hold above it on any test of that level -- and, assuming that pans out, I'll stalk an entry.

I generally look at pullback entries at between the 50% and 0.786 retracement levels and, for Cavium, this zone is between $41.60 and $43.56. Within this zone, I would like to particularly focus on the $42.59-to-$42.75 area, which includes the 0.618 retracement back to the last low, along with the 100% projection of the prior decline.

In other words, I would prefer to see the stock test and hold above this narrower area -- and see a follow-on buy trigger -- before I'd buy into this stock. But as long as the price holds above that larger zone and we see a buy trigger fire off, I'll be willing to place a buy-side bet. My maximum risk would be defined below the April 28 low. If a trigger does fire off, the initial upside target for the trade setup will come in at the 1.272 extension, or $49.46. The second target will come in at $52.

Cavium (CAVM) -- Weekly
Source: Dynamic Trader

If we back it up and take a look at the big-picture weekly chart, there are even higher targets, projected by a prior larger swing, at $55.37 and $64.37.

Bottom line: The risk in Cavium is low relative to the upside potential -- as odds are up for a rally to unfold in the coming months. For a trigger, I like to use either a 15- or 30-minute chart and see the eight-day EMA cross above the 34-day EMA. That generally tells me it's worth placing a bet.

Please refer here for more information on trade triggers.

See here for general guidance on Fibonacci trade setups.

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