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After a big run, Rambus (RMBS) corrected back to a potential reversal zone. The move from early September to mid-December sets the bullish tone with a breakout at 17.5. Big moves are often followed by corrections, and the decline back to 17-18 looks corrective for three reasons. First, the decline retraced just over 62% of the prior advance. Rambus is a volatile stock, and an overshoot can be expected based on above-average volatility. Second, the decline returned to broken resistance around 17.5, and this represents a support area. Third, the pattern looks like a falling wedge, which is typical for a corrective decline. |
Since moving into the reversal zone around 17-18, RMBS has consolidated and volatility has contracted. The Bollinger Bands have been overlaid. The middle band is the 20-day simple moving average (SMA). The upper band is two standard deviations above the 20-day SMA and the lower band is two standard deviations below the 20-day SMA. Standard deviation is another term for volatility, and a volatility contraction or a narrowing of the upper and lower bands usually precedes breakouts. Note that these bands are the narrowest in more than six months, and traders should be on guard for a breakout. |
Figure 1: Rambus. Noticeably absent from the recent run in semiconductors, this stock now shows signs of support and a volatility contraction. |
Graphic provided by: MetaStock. |
Graphic provided by: Reuters Data. |
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While there are plenty of reasons for support, these have yet to translate into buying pressure and a breakout that would signal a continuation of the prior advance. The stock broke above the upper trendline of the falling wedge with a gap on February 14, but there was no continuation and the stock worked its way lower the last eight days. There are now two small reaction highs around 19 (18.85 and 19.09). A move to 19.10 would break these reaction highs and exceed the upper Bollinger Band to signal a continuation higher. |
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