|Corrections to any sustained moves, either up or down, occur either in the opposite direction, sideways, or both. One of the hints that a correction may be ending is when the indicators start showing divergence with price. This is particularly true where the main trend is not particularly strong. Traders should always remember divergence is not a tradable signal and the actual buy or sell signal is the price breakout. Looking for entries on correction ensures that the risk/reward on trades is significantly enhanced. Corrections take place both in terms of price as well as time and corrections continue until they are completed in both paradigms.|
|Figure 1: Daily chart of Cisco Systems.|
|Graphic provided by: eSignal.|
|After a downward correction, Cisco's daily chart has been moving sideways for the past few sessions. While the price has remained stagnant, the indicators are showing divergence with price, forming higher bottoms. This indicates that the bears may be getting exhausted and Cisco may be ready to move up. If so, price is likely to challenge the previous highs. The divergences are clearly visible in both the MACD histogram and the RSI, both extremely strong signals, but trades should be initiated only on price breakout from this sideways range. This trade will fall into the low risk category, as its being entered after a correction to the main trend.|
Figure 2: Weekly chart of Cisco Systems.
On the weekly chart, Cisco has formed a 3-year bottom and is still holding above the breakout level of $22, which occured in early November. After the breakout, the stock rallied to about $28 and has now corrected back to $22, setting up a low risk opportunity with a close stop at $22. The weekly RSI has got support at the 50 level and thus maintains its bull trend, the stochastic has reached oversold level and thus the stock may have bottomed in the medium-term. Cisco does seem to be ready for a rally, and a first target should be the recent top of $28 and the stop at $22.
|Title:||Chief mkt strategist|
|Phone # for sales:||9871066337|
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