JDSU: Swan Song Or Sustainable Trend?

01/18/11 09:35:58 AM

by Donald W. Pendergast, Jr.

Back in the heyday of the late 1990s dotcom era, shares of JDS Uniphase were thought to be invulnerable to a major decline. We all know what happened to it in the 2000-02 bear market. Are things really all that different now?

Security: JDSU
Position: N/A

The Internet bubble days (daze?) of the 1990s; a wondrous time when anybody (and nearly everybody) fancied themselves to be a masterful stockpicker and market prognosticator. After all, we'd all been conditioned to believe that a new wave of high-tech wonders would continually drive the new economy into a never-ending, perpetually rising epoch of economic growth, widespread prosperity, and global free trade. And, from 1994 through 1999, despite some nasty stock market hiccups, this Alice in Wonderland mindset did indeed appear to be proving out in the world, as well as in our monthly mutual fund and discount brokerage account statements. Sure, the LTCM blowup and Russian default debacle in August 1998 might have caused some investors and traders to tread a bit more lightly as we approached the end of the millennium -- for a little while, anyway -- but by January 1999, the stock buying frenzy was back -- and twice as hungry for quick and easy market gains.

Shares of JDS Uniphase (JDSU) did phenomenally well during the final frenzy stage of the NASDAQ/dotcom runup (starting from a value of $31.25 on October 25, 1998), rising by more than 3,700% as of March 7, 2000, when they finally hit their all-time high of $1,227.38. JDSU was one of the "can't-miss" tech stocks, due to the common belief that the fiberoptics market was going to experience near-exponential growth for years to come. Ha!

Like all stock bubbles, latecomers to the JDSU party got hammered badly; the stock plunged by 50% in less than six weeks after the all-time high was made before managing to rise back to the $1,124 level in late July 2000. After that rebound, the stock just plain went into full-scale freefall. It just didn't seem to know when to quit -- and despite several tiny reaction moves higher over the ensuing 14 months, the stock finally began to slow its rate of descent only after the selling pressure of the 9/11 catastrophe had finally played out. The stock found a temporary bit of support near $41, but still found new ways to trend ever lower, dropping to $12.64 by October 2002. JDSU found some new buyers during the initial phase of the 2003-07 bull market, but by November 2008, this former Wall Street darling was selling for the princely sum of $2.01 per share. How times had changed. (See Figure 1.)

FIGURE 1: JDSU, DAILY. Every market will usually provide a few hints regarding a possible reversal -- often days, weeks, or even months in advance, depending on the time frame being studied. Waning money flow, extended moving average spreads, and a noticeable, parabolic rise all suggest that JDSU is nearing the end of this particular uptrend.

Graphic provided by: MetaStock.

So what does that tale of stock market triumph and subsequent tragedy have to do with the current technical configuration of JDSU shares in the here and now?

There are a couple of lessons here. First, no market is immune from the possibility of going into a speculative mania phase -- one that defies all rational valuation and causes normally sane individuals to cast aside a healthy fear of financial loss, even as the risk-to-reward ratio of further involvement with such high-flying stocks progressively dwindles to zero. Ultimately, such buying manias give way to relentless, panic-driven waves of selling that crush many of the latecomers to the stock accumulation celebration.

Second, we can learn to identify similar (but not exact; no two market periods are ever identical) occurrences as they occur in real-time -- like right now, with all the major US stock indexes now up to nosebleed levels (especially since March 2009) and with many early warning signs of institutional distribution already under way, it doesn't take a charting genius to figure out that JDSU is once again vulnerable to a significant selloff. Just look at the chart:

* Long-term money flow is showing a clear and present negative divergence with price
* The stock is up more than 750% since March 2009
* The NASDAQ 100 index (QQQQ, NDX) is ripe for a significant correction, as is the Dow 30 (INDU, DIA), Standard & Poor's 500 (SPX, ES), and the Russell 2000 (RUT, TF).

While the market isn't in the same kind of mania that lasted from October 1998 through early 2000, the fact remains that with so many advisors and individual traders/investors so firmly convinced of continued stock market gains in 2011 and beyond, the least bit of a headwind could derail this major uptrend in very short order, begetting selling upon selling -- upon still more selling.

The ER indicator in MetaStock (see my earlier article concerning shares of Marathon Oil [MRO]) is now approaching 0.17 on JDSU's daily chart (that means there is a nearly 17% spread between the stock's 10- and 50-day exponential moving averages) and this is usually the area where we can start to begin anticipating a sharp reversal; previous market turns have occurred near 0.16, 0.17, 0.18 and a couple near 0.19, so we know that the probabilities favor a breakdown sooner rather than later.

Aggressive traders might wish to begin buying at-the-money puts with at least two to five months of time value, perhaps even scaling into a full position if the stock decides to grind a dollar or two higher in the next week or so. Right now, March $22.50 JDSU puts can be bought for about $1.15, and with a daily time decay factor (theta) of only 0.01 (or $1) per day, these might stand to make you a decent profit on a swift correction back down toward $14-$14.50, the first major support level are in shares of JDSU. As in all things trading related, timing is almost everything, so be sure to use a proven trading system or reliable discretionary chart template to help you profit from what may yet prove to be another memorable bear market in US stocks.

Just be sure to limit account risk to no more than 1 to 2%, no matter how much you may also agree with this technical/fundamental view of this stock.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title:	Writer, market consultant
Company:	Linear Trading Systems LLC
	Jacksonville, FL 32217
Phone # for sales:	904-239-9564
E-mail address:	lineartradingsys@gmail.com
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TECHNICAL ANALYSIS

JDSU: Swan Song Or Sustainable Trend?

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