Thursday, November 4, 2010

Force Index + A Chart of 2 Divergences - QCOM Weekly

I had mentioned previously that I am trading QCOM options based on analyst reports that the smart phone boom is going to bring up a few of these manufacturers directly involved. This is done through QCOM's snapdragon chipset which is going to be used in the newest line of Android based smart phones and mobile computing devices (*Pads) released by HTC and Asus. Furthermore, word on the street is that QCOM may be getting some of the action from Apple as well due to their CDMA technologies.

Anyway, that's the fundamentals but was there any clues from the TA portion? You betcha! And it was a pretty amazing one too - you get a bullish divergence that follows a bearish one almost immediately!

The falling of QCOM at the beginning of the year was fore-told by a MACD-Price divergence. Also included my personal favorite form of divergence confirmation - the false break-out setup. There wasn't much time to act however. The confirmation lasted 1 week (this is a weekly chart) and then prices just plummet as fear sets in.

Then the prices rallied, and a second wave of selling came around May '10. However, this time, the MACD again shows a divergence in the opposite direction - a bullish one! It was also around this time that analyst reports start coming in about the coming smart phone boom. Again, there is the false break-out(down) confirmation that screams "BUY!" to me. However, I would like to highlight an additional indicator here that I like to use to detect buy signals during a sell down - the Force Index.

The Force Index should be used only to detect buy signals (does not work well in sell signals) as it measures the market sentiment in the direction the price is heading. The larger the number of trades done in that direction, the deeper the spike - as you can see in January 10 in the chart above. As the selling elevates, the FI retracts and yet the prices continue to drift downward until the year-low at the end of May '10 - this is a very good indication that the prices are going to recover soon.

And therefore, my decision to long QCOM (call options) uses 3 forms of TA indicators - the MACD-H vs Price divergence, FI vs Price divergence and False Break-Down.

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