CIEN: Double Bottom Or Dead Cat Bounce?

05/20/05 07:49:19 AM

by Arthur Hill

Volume and momentum suggests that the recent bounce in Ciena may be more than the dead cat variety.

Security: CIEN
Position: Accumulate

Not many stocks have been pummeled the way Ciena (CIEN) has. The Networker traded above 150 in October 2000 and below 3 in October 2002. The stock has been basically flat since October 2002, as it traded between 1.5 and 8.15 during the last few years. With the stock at the lower end of this range and volume picking up, it may be time to consider the bullish possibilities.

The pattern at work looks like a potential double bottom. These are bullish reversal patterns that form after an extended decline. CIEN declined from 8.14 to 1.67, bounced and again tested this low in April (Figure 1). The double bottom is working and a move above the intermittent high (3.5) would provide bullish confirmation.

Figure 1: Ciena. The bounce in late April occurred on the highest weekly volume in two months (gray arrow).

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

While waiting for confirmation improves the chances of a successful reversal, catching a move off support improves the risk-reward ratio. A recent surge in volume and positive divergence in the relative strength index (RSI) suggests that this bounce off support will continue. The bounce in late April occurred on the highest weekly volume in two months (gray arrow). This shows renewed interest in the stock and reinforces support.

For momentum, RSI became oversold in August (<30) and held above its prior low in April to form a large positive divergence. This shows less downside momentum on the last decline and selling pressure is waning. RSI now needs to move above 50 to convert less downside pressure into some actual upward pressure.

Finally, I will put one more hurdle on the stock and require a break above the trendline extending down from January 2004 (2.5). Such a move would open the door to resistance at 3.5 and increase the odds of a bigger breakout.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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CIEN: Double Bottom Or Dead Cat Bounce?

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