Broadcom Beats on Earnings, but Stock is Overbought

Broadcom Inc. (AVGO) beat earnings per share (EPS) estimates for the 31st consecutive quarter when it reported results after the close on June 4. The positive reaction to this report was short lived. The stock traded as high as $328.11 on June 5 and then faded below its monthly and quarterly pivots at $300.40 and $297.35. The stock remaining below its all-time intraday high of $331.58 set on Jan. 24 is a concern for the bulls.

Broadcom stock closed Tuesday, June 16, at $310.72, down 1.7% year to date and 6.3% below the all-time high. The stock is also in bull market territory at 99.6% above its March 18 low of $155.67. Broadcom has a P/E ratio of 18.10 and offers a generous dividend yield of 4.29%. This makes the stock an appropriate company for value investors.

The daily chart for Broadcom

The daily chart for Broadcom shows that the stock has been moving sideways to up, tracking its 200-day simple moving average. The stock set its all-time intraday high of $331.58 on Jan. 24 – then came the March crash.

Broadcom stock fell below its 50-day simple moving average on Feb. 20, and the 200-day simple moving average failed to hold on Feb. 25. The stock plunged from $331.58 on Jan. 24 to the March 18 low of $155.67. This bear market was a decline of 53.6%.

The V-shaped rise from the March 18 low reached the 50-day simple moving average on April 9. The 200-day simple moving average was recaptured on May 27. The second quarter pivot at $297.35 and the monthly pivot for June at $300.40 have been magnets.

The weekly chart for Broadcom

The weekly chart for Broadcom is positive but overbought, with the stock above its five-week modified moving average of $288.92. The stock is also above its 200-week simple moving average, or reversion to the mean, at $249.85. Broadcom has been above this key average since the week of April 10.

The 12 x 3 x 3 weekly slow stochastic reading is projected to rise to 85.19 this week, moving above the overbought threshold of 80.00, on a scale of 00.00 to 100.00. If this reading rises above 90.00, the stock would be in an "inflating parabolic bubble" formation.

Trading strategy: Buy Broadcom stock on weakness to its 200-week simple moving average at $249.85. Reduce holdings on strength to the annual risky level at $337.86, which would be a fresh all-time intraday high. The quarterly and monthly pivots at $297.35 and $300.40 will likely be magnets until the end of June.

How to use my value levels and risky levels: The stock's closing price on Dec. 31, 2019, was an input to my proprietary analytics. Semiannual and annual levels remain on the charts. Each calculation uses the last nine closes in these time horizons.

The second quarter 2020 level was established based upon the March 31 close, and the monthly level for June was established based upon the May 29 close. New weekly levels are calculated after the end of each week, while new quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year, and annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and the lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an "inflating parabolic bubble" formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered "too cheap to ignore," which is typically followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.