The Broadcom Tease and Today’s S&P

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Happy Saturday, everyone. I'm sorry I've been relatively quiet lately, being AWOL from comments and not posting that much. It's been pretty hectic here at the house, and anyway, these relief rallies don't put me in a very chatty mood.

I wanted to use today's post to point out one of my favorite examples of a pattern which hemmed and hawed for a while before finally blossoming into its full potential. Specifically, I am speaking of Broadcom in the summer of 2000. I wanted to use this example as an object lesson for those wondering what's going on with the purported head and shoulders pattern in the current equity markets.

Broadcom, like many networking-oriented stocks in the summer of 2000, was defying the crack in the markets (which began in earnest several months prior). However, it had formed a textbook-quality head and shoulders pattern. What was frustrating was that, after it broke its neckline – exciting BRCM bears tremendously – it made an obscene gesture, turned around, and pushed up again.

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You can imagine the disappointment of BRCM bears after this little exercise, since the stock shot about 40 points higher from its supposed breakdown point. And then, to add salt to the wound, BRCM did the same schtick again:

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It seems that the BRCM bulls were fighting very hard to keep that 135 level supported. At this point, the bears must have been pulling their fur out in frustration. Most cruelly of all, BRCM broke a third time – – and wiser bears surely simply rolled their eyes, crossed their arms, and did nothing. You can imagine what happened next:

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In fact, the stock went on to lose another 50% of its value from even the lowest depths seen here, but you get the idea.

So what does the current S&P look like?

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My point is that a pattern made "impure" by such shenanigans isn't rendered useless; it still merits observation. As I am looking at individual charts, the furious "bounceback" is taking place (take a look at DCTH for a fine example, as well as BID) to relieve oversold conditions. But my sense is that this mini-rally fuel is going to run out soon, and I am positioning myself accordingly.

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