Tuesday, January 29, 2013

Long term technical analysis + today's action

Today's price action on CNIT was quite interesting, but before we get to that let me make a few comments on technical analysis for this stock.

Given the lack of liquidity in small cap stocks, technical analysis tends to be less useful when applied for short or even mid term trades. Long term trends, where volume has time to accumulate, can be interesting to look at, but even then there are frequently less discernible patterns than for highly liquid stocks. Note also that in microcaps there tends to be less machine trading, which, among other things, means that patterns will be fully dictated by personal investor sentiments, funds (where appropriate), insiders, and, largely, news.

The following graph shows the daily chart since early 2011, with price consolidating over the last year in a range around $1. The fact that the range has been so tight for such a long period of time is a combination of inaction in the stock as well as a potentially bullish indicator.

The white line is the 200 DMA. This moving average has been on the decline for years, and currently stands at 1.02. The 100 DMA and 50 DMA, which are plotted below (in yellow and pink, respectively), have been below the 200 DMA for this entire period. The 100 DMA is ticking up, however, and a move above the 200 DMA could also be a bullish indicator.

There are a variety of additional long term patterns and indicators which could be used to make a bullish case for CNIT, but as per my earlier caution I don't think it's worth making too much of a technical case for a microcap stock.

Today's action
Now onto today's action. The stock open lower, shot up to spend most of the day between 7% and 11% up, and finished the day at a clean 0% change. What does it all mean?

Volume was quite high today, with over 200k shares traded compared to a 30-day average (which includes yesterday's high volume day) of around 30k. This morning's trading felt very positive, and represented the majority of the volume, with the price dwindling on few trades throughout the afternoon.

It's possible there were some folks who had been in the stock long term and were ready to get out at any early signs of a breakout. It's also possible that folks who bought in at the $1 +/- $0.2 (and there are many of those - do a volume at price chart for the past year to see for yourself) were happy with a 6-10% short term gain. In either case, getting those folks out of the stock isn't necessarily a bad thing for a longer term investor, or for someone with the patience to ride a longer breakout.

From a technical standpoint (for the necessary caveats refer back to paragraph 2), the candlestick for today's action was a "shooting star". It shot up, but ended right where it ended yesterday, but at least made up for some lost ground in early trading.

Generally a shooting star is a bearish pattern, though it can also signify a trend reversal. In either case, it requires confirmation and more indicators before it's recommended a trader take action on it (but hey, don't all technical indicators require confirmation?). For me, this is more bearish than bullish from a technical standpoint because it looks like a failed breakout. Looking at a long term chart, however, you might read it as a trend reversal towards the upside.

Since, from what I can tell at least, there wasn't any particular news out of CNIT today, it's highly likely that today's trading was largely impacted by yesterday's bullish patterns and speculation about what direction the stock might take. I'd wager the afternoon drop-off was due to investors feeling impatient and either taking small short-term gains or slightly lower long-term losses than they would at $1.

With all this, I believe tomorrow will be a deciding day for CNIT. I'm looking for decent volume (at least 100K shares traded) and a small early gain to feel good and start sensing more bullishness out of the stock. If however volume is very low, this could signal resumed inactivity for CNIT trading. If volume breaks upwards of 350-400K shares with a gain, I would add to my position expecting a breakout to occur with significant potential upside.


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