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CHART ANALYSIS


Brocade Breakout?

03/01/04 09:20:25 AM
by Matt Blackman

This one-time Internet high flyer is making a comeback. This round, it appears to be taking the slow but steady route.

Security:   BRCD
Position:   N/A

A February 27th alert from Recognia.com, Brocade Communications (BRCD) gave both a diamond bottom and bullish continuation triangle signal with projected targets of $9.00 to $10.10. A quick look revealed an interesting weekly chart.

Figure 1 Brocade Communications (BRCD) weekly chart showing slow but steady appreciation.
Graphic provided by: MetaStock.
 
The reverse-engineered relative strength index (RSI) mid-line looks to be in the process of changing from resistance (which it had been since late 2000) to support. It looks ready to break through the 50 or mid-line on the reverse engineered RSI (which simply overlays the relative strength index mid-line on the price chart). The previous downtrend line was decisively broken in October 2003 and a new uptrend line was recently confirmed in supporting the price action of the bull move at least three times. Also note the build in the finite volume elements indicator in top window. This indicator includes volume and so is reasonably good at showing money flow.

Once past the first diamond bottom's projected low target of $9.40, there appears to be very little resistance until it gets to $13.00. Also interesting is that the first Fibonacci retracement level to 23.6% of the 2000 peak is just north of $34.00, slightly below the November 2002 high shown on the chart.

Fundamentally, the P/E (trailing twelve months) is high at 116. The forward P/E using estimated 2004 earnings is a little more reasonable at 54 and from the standpoint of Internet plays might be considered cheap, especially if investors maintain their current 1999-nostaligic narcosis high. The stock is currently trading around three times book value (78% of industry), with a price/sales of 3.30. Free cash flow/share is on the rise and currently $0.17. Revenue/employee is also climbing and was $471,700 last quarter, up from $427K the previous quarter. Short interest is low and falling at 3% of float. Revenues have shown a slow but steady growth in the last four quarters.

Insider transactions have been very positive in the last twelve months. The CEO Greg Reyes bought 2.5 million shares in March 2003 at $4.01/share that he continues to hold. The only insider sale was by the CFO who sold 4,903 shares in June at $6.43. Insider buying has proven to be a reliable positive indicator, especially in a bull market.

Looks like yet another interesting upside play, on track to retrace a bigger part of its previous lofty share price, at least as long as investors remain ebullient.

SUGGESTED READING:

Blackman, Matt [2004] Insider Update (http://technical.traders.com/tradersonline/display.asp?art=1513), Traders.com Advantage, January 9

Bulkowski, Thomas N. [2000] Encyclopedia of Chart Patterns, John Wiley & Sons



Matt Blackman

Matt Blackman is a full-time technical and financial writer and trader. He produces corporate and financial newsletters, and assists clients in getting published in the mainstream media. He is the host of TradeSystemGuru.com. Matt has earned the Chartered Market Technician (CMT) designation. Find out what stocks and futures Matt is watching on Twitter at www.twitter.com/RatioTrade

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E-mail address: indextradermb@gmail.com

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