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Brocade Bullish Price Objective

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This morning's top sector is the Networking Index (NDX.X), so lets see what's going on with its chart.

Networking Index Daily Chart

Ah yes, the oh so familiar downward channel technology is stuck in. The Semiconductor Index (SOX.X) is making the best attempt to break out of it, the Software Index (GSO.X) is trying but failing, and now it's the Networking Index's turn. Adding resistance is the 50-day moving average that is hidden in the upper boundary of the channel. Even if NWX can break out of the channel, it still has to complete a cup with handle formation to form a bottom with some substance.

Brocade Communications Point and Figure Chart

Since Brocade (NASD:BRCD) is leading the networking stocks, some readers may have pulled up a point and figure chart to calculate a bullish price objective. The calculation of the bullish price objective for Brocade is more difficult than meets the eye. When a stock is trading below 20, the standard box size is .5. When the stock gets above 20, the box size changes to 1. The column of Xs that issued the buy signal for Brocade contains 6Xs below 20, and 7 Xs above 20, so how do we perform a vertical count? The calculation must be broken up into two separate counts. First we will calculate the count for the .5 box size. There are 6 Xs below 20 * the box size of .5 * the bullish multiplier of 3. This gives us 9 (6 * .5 * 3 = 9). Next we need to calculate the count for box size of 1. 7 Xs above 20 * box size of 1 * bullish multiplier of 3. This gives us 21 (3 * 1 * 7 = 21). Adding those two together we get 30 (21 + 9 = 30). Now add that to the column low of 17.50, and we get a bullish price objective of 47.50. Simple wasn't it.

Jeffrey Canavan
Assistant Analyst

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