Covad Under Heavy Accumulation
Broadband provider Covad
Communications Group appears to have formed a durable bottom and is responding
to positive news. Under my style of intermediate-term trading, I’d insist on
substantial recovery in this stock before looking for entries. But there are
earlier entry points for traders.
On Monday, the Covad
(
COVD |
Quote |
Chart |
News |
PowerRating)
entered a $600 million deal to provide digital subscriber line (DSL) to No. 2
local telco SBC Communications
(
SBC |
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Chart |
News |
PowerRating) for six years. SBC also will invest
$150 million to take a 6% position in Covad. The agreement is subject to
antitrust and regulatory approval. The stock jumped 2 to 20 3/8 on six times its
usual trade.
Anyone who reads this column knows I
like to buy stocks as they break above pivots points after having largely
recovered from past corrections. Covad is obviously under heavy institutional
accumulation. Just look at the price gains on heavy volume over the past four
days.Â
But I still would worry about overhead
supply. Overhead supply amounts to shares of stock in the hands with investors
with paper losses. These shareholders tend to sell into rallies, which blunts
further price progress. So I insist that a stock recover above its 50- and
200-day moving averages and its mid level before looking for possible entry
points.
Covad has yet to satisfy on any of
these counts, let alone my insistence that most candidate buys meet all three. (Covad’s
mid level, the half way mark between pre-correction high and correction low, is
around 40 a share.)
For those who like to get in earlier
on recovering stocks, I would suggest a pivot point of 30 9/16, Covad’s intraday
high on June 5 (see Point A in above chart).
Some traders might feel tempted to go long on a break above 23 11/16, the
resistance level Covad encountered on July 14 (see Point
B).
However, I’d still be worried about
weak holders who got into the stock shortly before the June 15 gap-down
sell-off. Setting the pivot higher at 30 9/16 gets you past some of that
overhead supply.
All stocks, of course, are
speculative. On any new trade, be sure to limit your risk by limiting your
position size and setting a protective price stop where you will sell your buy
or cover your short in case the market turns against you. For an introduction to combining price stops
with position sizing, see my lesson,
Risky Business. For further treatment of these and related topics,
you’ll find a mother lode of lessons in the Money
Management area of TradingMarkets’ Stocks Education section.