October 24th, 2012
When the market has been as frustrating as it’s recently been, you are always on the lookout for something to reinforce your confidence and beliefs. It came this week from an extremely surprising direction. A stock chart that ultimately delivered on its promise.
When I purchased ARMH (ARM Holdings PLC) on February 29, I wrote to members of my Instant Alerts service that that stock “was captured in several of the previous “Stocks on the Move” scans and is a favorite of momentum traders. The stock has been trapped in a 12-mos. consolidation pattern. Whether you see a horizontal channel, an inverted head-and-shoulders or a cup-and-handle doesn’t really matter that much. The point is that a breakthrough on the upside with a strong market as tailwind could lead to substantially higher prices.”
Unfortunately, that horizontal channel morphed into a descending channel or flag. There were many times during the past eight months that I felt like I should sell the stock but I felt that, given time, the stock would come through with its promise of a strong upward push.
A large contributor to that confidence came from the favorable divergence between the stock price action and the volume trend. As indicated in the above chart, OBV (or on-balance-volume, the running total from adding the volume on up days less the volume subtracted on down days) has continued to edge ever so slightly higher while the price fluctuated lower from the high- to low-20’s. That divergence tends to suggest that demand for the stock has exceed supply even as the stock’s price has slipped.
This quarter, ARMH “reported a very strong quarter, coming in at $227M in revenues for the quarter against mean analyst estimates of $222M, up 20% y/y. Pre-tax profit of $108.5M was up 22% y/y.” Was this an extraordinary earnings report and significantly improved over prior quarters? I don’t profess to understand (nor do I really care) why the move took place at this time. But I do believe that others who do understand the technology and care about the company’s financial performance (aka, “the Herd”) have been accumulating the stock for the past six months. That patience was rewarded by a 12-14% gain over the past two sessions.