I reviewed the chart of Broadcom (AVGO) earlier this month as share prices were climbing, and wrote that "the question is where to buy it and what to risk. Upside price gaps create a problem in that it can mean we might have to assume more risk than we want to. Tentatively I would like to buy AVGO at $550 or lower and then risk to $510."
Prices have rallied, but the underlying indicators have weakened so a new strategy is needed.
In this daily bar chart of AVGO, below, I can see that prices surged to around $580 and have begun pulling back. Trading volume increased, but the On-Balance-Volume (OBV) line has turned lower. The 12-day price momentum study shows lower highs from November to December, even though prices made higher highs. This difference between the price action and the indicator is a bearish divergence and the slowing pace of prices is an early warning of a downside reversal.
In this weekly Japanese candlestick chart of AVGO, below, I can see a large upper shadow on a candle in early December. An upper shadow tells us that traders rejected the upside. The weekly OBV line shows the start of a potential high. The Moving Average Convergence Divergence (MACD) made a cover shorts buy signal but still remains below the zero-line.
In this daily Point and Figure chart of AVGO, below, I can see that prices reached an upside price target of $575.
In this weekly Point and Figure chart of AVGO, below, I can see an impressive long-term price target in the $814 area but a trade at $585 or higher is needed to refresh the uptrend.
Bottom line strategy: Traders who have gone long AVGO on our buy recommendation earlier this month should raise sell stops to $539 or just sell their position. When the indicators change, so should the strategy.
