Analog Devices (ADI) surged to a new high on Wednesday but quickly reversed lower. This big reversal on the charts should not be ignored and could well be a signal for more weakness in the days ahead.
Let's go over our charts and indicators to see if we can plot a logical strategy from here.
In this daily bar chart, below, we can see a strong uptrend in the price of ADI only interrupted by sideways consolidations. ADI made a high short of $85 in March and then pulled back in April and early May. ADI rallied quickly from $75 in early May to make a new high this Tuesday and then a rapid and very very brief surge to over $90.
Prices gaped up on the open Wednesday and gave back those gains the rest of the session. Selling continued on Thursday. Heavy volume and a rapid up to down reversal is a sign of a buying climax. ADI is likely to be at risk of further weakness as the On-Balance-Volume (OBV) line rose sharply, signaling pretty aggressive buying, which means a lot of traders bought the stock in recent weeks and they could quickly be "under water" and encouraged to liquidate those positions.
ADI could break below the 50-day moving average line in the near term, which might prompt some chartists to sell or recommend selling. Looking at an intraday chart (not shown) suggests that there might be some support around the $80 area and a break of this level could prompt further selling as these former buyers encounter losses. The 12-day momentum study in bottom panel shows a small bearish divergence in the past two weeks and probably would not have been a serious warning flag in real time.
In this daily candlestick chart, below, we show the reversal more dramatically with the long red (bearish) candlesticks. The daily slow stochastic indicator was overbought heading into this reversal.
In this weekly bar chart of ADI, below, we can see that the longer-term view is still bullish with prices above the rising 40-week moving average line. The weekly OBV line was rising from June 2016 but has been sideways the past four months. The weekly Moving Average Convergence Divergence (MACD) oscillator is in a decline after a liquidate longs sell signal in early April.
Bottom line: ADI is correcting and weakness below $80 is likely to precipitate further declines. If long ADI at a profit I would suggest raising stop loss protection to just below $80.