Momentum Stock Broadcom (AVGO) May Have Topped Out

Broadcom Inc. (AVGO) beat earnings per share (EPS) estimates for the 31st consecutive quarter when it reported results after the close on June 4, but the positive reaction to this report was short lived. The stock set its all-time intraday high on strong upward momentum at $378.96 on Sept. 2. The stock then traded as low as $343.48 on Sep. 21. At the high, Broadcom failed to hold its semiannual risky level at $377.65, where profits should have been taken.

The stock closed Thursday, Sept. 24, at $352.52, up 11.5% year to date and in bull market territory at 126.5% above its March 18 low of $155.67. The stock is 7% below its all-time high. Broadcom has a P/E ratio of 20.24 and offers a generous dividend yield of 3.70%, according to Macrotrends. The semiconductor giant designs and supplies semiconductors and infrastructure software for the wireless and broadband communication industries.

The daily chart for Broadcom

The daily chart for Broadcom shows that the stock declined 53% from a high of $331.58 on Jan. 24 to the March 18 low of $155.67. From this low, the stock had a bull run of 143% to its all-time intraday high of $378.96 set on March 18.

Broadcom stock fell below its 50-day simple moving average (SMA) on Feb. 20. The 200-day SMA failed to hold on Feb. 25. The V-shaped rise from the March 18 low reached the 50-day SMA on April 9. The 200-day SMA was recaptured on May 26.

A golden cross was confirmed on July 6, when the 50-day SMA rose above the 200-day SMA, which led the stock to its all-time high. Broadcom rose above its third quarter pivot at $324.02 on Aug. 4 and then moved above its annual pivot at $337.86 on Aug. 26.

Note how Broadcom failed to hold its semiannual risky level at $377.65 on Sept. 2. The stock is also above its annual pivot at $337.86.

The weekly chart for Broadcom

The weekly chart for Broadcom is neutral with the stock above its five-week modified moving average of $343.50. The stock is also above its 200-week SMA, or reversion to the mean, at $261.06. Broadcom has been above this key average since the week of April 10.

The 12 x 3 x 3 weekly slow stochastic reading ended the week declining below 80.00 at 79.55. This is the negative divergence to worry about.

Trading strategy: Buy Broadcom stock on weakness to its annual pivot at $337.86 and to its quarterly pivot at $324.02. Reduce holdings on strength to the semiannual risky level at $77.65.

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 third quarter 2020 level was established based upon the June 30 close, and the monthly level for September was established based upon the Aug. 31 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.