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Avoiding the "tougher trades"

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Last week I made mention of Brocade Communications (NASDAQ:BRCD) $25.17 +2.8% when the stock was trading just below the $24 level. At the time, we noted that shares of BRCD had previously achieved their bearish vertical count from its point and figure chart of $22 and that the stock might be undergoing some short covering. Since that time, the stock did "pop" to as high as $27.05 last Friday, but continues to find sellers at downward regression from its bar chart.

Brocade Communications Chart - Daily Interval

I'd consider shares of Brocade Communications (BRCD) a "tough trade" at current levels. This goes for both bullish and bearish trades. The "bigger picture" from the point/figure chart hints that the stock may have hit a longer-term bearish target of bears than initiated positions up in the high $30s and may now be looking to lock in gains on those trades. At the same time the channel from regression is still intact and downward trending, thus a bull would be well-served to avoid the stock as a bullish candidate at this time, as it has had trouble several times at this level. With MACD wavering between up and down, but still below the zero level, this also makes a bullish trade less attractive.

As I try weighing the technical plusses and minuses, the only "plus" I see is that the stock achieved a bearish count and MACD is setting some higher lows. Conversely, the fact that the stock is in a rather solid downward trending channel, should have bulls looking the other way.

It's very difficult at this point to try and ascertain what upside and downside exists, beyond a 6-hour trading session. As I see it, the risk/reward for both bulls and bears on a near-term basis is 50/50 at best and there has to be some better risk/reward trades in the market than this stock. As such, I'd simply monitor the stock, but right now, I have little interest in trying to establish a position. Last Thursday in the market monitor I felt it best for a bear short the stock to get ready to move to the sidelines should the stock break above the $23.86 level and look for some stocks to short that may have still had some downside room to their bearish vertical counts.

One such stock has been shares of Adelphia Communications (NASDAQ:ADLAC) $20.40 -3.13%. As we have perhaps been observing, bears may have had "less reason" to step in and cover position as the bearish vertical count from the point and figure chart has been $4, and recent support from our retracement bracket at $21.42 was recently violated; putting at risk the 52-week lows near $18.76.

We're trying to stay focused on trading stocks with good upside/downside from current levels, where the technicals from both the point and figure and bar charts correlate in a direction where both tools hint of price direction and there's room to the bullish or bearish vertical counts.

Jeff Bailey
Senior Market Technician
Option Investor

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