Ciena Corporation (CIEN) is a global provider of telecommunications networking equipment and software. The company reported earnings before the opening bell on Sept. 5 and beat earnings per share (EPS) estimates for its fifth consecutive quarter. It didn't matter as the stock slumped anyway. The stock has been above a "golden cross" on its daily chart since March 19, 2018, but its weekly chart was negative, providing a warning.
The stock closed Tuesday, Sept. 10, at $39.65, up 16.9% year to date and in bull market territory at 40.9% above its Oct. 11 low of $28.23. Ciena is also in correction territory at 15.2% below its 2019 high of $46.78 set on July 29. In the longer term, the stock set its all-time intraday high of $1,057 in October 2000 and set its all-time low of $16.87 in October 2002. Now that's a crash!
Ciena stock is not cheap, as its P/E ratio is 22.11 without offering a dividend, according to Macrotrends. Evercore began coverage of the stock with an outperform rating and a $48 price target. The analyst firm cites Ciena's 17% year-over-year revenue growth, but the problem for the company was that its Asia-Pacific revenues fell by 21%.
The daily chart for Ciena
The daily chart for Ciena shows that the stock above a "golden cross" since March 19, 2018, when the 50-day simple moving average rose above the 200-day simple moving average, indicating that higher levels lie ahead. There was a buying opportunity at the 200-day moving average at $23.07 on May 31, 2018. The next test of the 200-day was on May 13, 2019, when the average was $34.04.
Today, the stock is trading around its 200-day moving average once again at $38.80. Its annual value level is $24.50, with semiannual and quarterly value levels at $32.43 and $37.22, respectively. The monthly risky level is $46.00.
The weekly chart for Ciena
The weekly chart for Ciena is negative, with the stock below its five-week modified moving average of $40.99 and above the 200-week simple moving average, or "reversion to the mean," at $26.46. The "reversion to the mean" was last tested at 21.73 during the week of Feb. 9, 2018. The 12 x 3 x 3 weekly slow stochastic reading is projected to decline to 39.56 this week, down from 49.32 on Sept. 6.
Trading strategy: Buy Ciena shares on weakness to the quarterly and semiannual value levels at $37.22 and $32.43, respectively, and reduce holdings on strength to the monthly risky level at $46.00.
How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play. The weekly level changes each week. The monthly level changes at the end of each month, most recently on Aug. 30. The quarterly level was changed at the end of June.
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 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. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.