Whether today's report that Cavium Networks (CAVM) could be a likely takeover candidate caused the breakout in price or if it was just an excuse applied to a stock on the verge of a breakout doesn't really matter. The price action over the next few days should dictate whether there are longer-term buyers here or simply those looking to catch some quick momentum. I like the Cavium charts, both daily and weekly, but I'm not quite sold.
The daily chart shows a nice break higher in price. This is confirmed by the push in the RSI. Notice how the RSI still hasn't hit the same heights as the previous March highs, though. This isn't necessarily bearish, as the RSI is still rising, but it gives me some pause. We are pausing just above the previous highs. A close here today is actually going to be very tough. We're likely to take a quick trip back near $72 or just plow straight higher. I don't see the situation where we trade sideways for a few days playing out here.
There are no weekly calls here, but the June $75 and $80 calls are seeing plenty of activity. My preferred approach, if I were making a trade today, would likely be to sell June $70 puts and buy June $75-$80 call spreads for around $0.90. If Cavium went under $70, I would be looking for an exit, although I would considering adding on a bounce off $72. I'd rather not make the trade today, though, and look at tomorrow or Monday, angling to catch some small pullback here. The stock is up almost 20% in less than a month, so it is quite possible with this double top and recent move that we do see a small pullback.
The weekly chart is very interesting. There is a "V" pattern to the stock that keeps repeating. Granted, these patterns aren't all the exact same in size, but the characteristic of the moves is very similar, especially in time. Again, these aren't exact, but in eyeing these patterns, if Cavium finishes the week over $75, then we can expect a push higher early next week.
The tricky part of this "breakout" from the "V" pattern is that it hasn't been very good for anything other than a two-week swing long. The better trade has been buying the crossover at the base of the same "V" pattern in the slow stochastics. That doesn't make this chart bearish, but it does seem to spell out that this may not be the most efficient longer-term entry. Buying here is more suited toward a one- to two-week swing trade, while the other entry is more like three to four months for a hold time after entry. This would not invalidate the aforementioned option trade, as it would do very well if Cavium were to move higher over the next week or so.
The wild card here is a buyout, but I'm not looking to base a play on that alone, so if I were to miss it, then I miss it. It's as simple as that. You lay out a plan and follow it to the best of your ability. Sometimes a wild card will derail that plan and you just have to adjust and move on. I'll take that chance on Cavium and see how the next two days play out.