Broadcom (AVGO)
Broadcom is a standout company and one of my top three positions. It boasts an excellent management team, strong fundamentals, and consistent growth. The company has established strong recurring service revenue, making it slightly less cyclical than the semiconductor sector. However, I have concerns about the near-term price trend.
In the semiconductor sector, there is a consistent ebb and flow between semiconductors and the broader market. We can identify lengthy periods where semiconductors attract speculative attention using the Relative Strength Index (RSI) and a 3-week chart. The RSI peaks, and outperformance shifts to the broader market. I discuss this in detail in my article on cycle analysis:
https://ben1148x2.substack.com/p/cycle-analysis-and-the-rolex-of-charts
I learned of this cycle following https://x.com/chrono_chartist. He has established himself in cycle analysis, and I would not have plated this Bitcoin cycle as well as I have without the work he shares.
Outperformance by the broader market doesn’t mean all semiconductors underperform. It means we need to focus on the best in breed and remain flexible to adapt to market changes.
Overview chart
Weekly - Upper Left
Weekly charts indicate the trend direction.
I use a 325-period simple moving average (SMA). Strong companies in lengthy uptrends should see institutional buying at this slow-moving average.
The oscillator at the bottom measures the volatility-weighted distance from the 325SMA, with the least squares moving average confirming direction. There is an ongoing bearish divergence between price and distance from the moving average. Volatility in a downtrend can close that gap more quickly.
There are slight air gaps in the volume profile below us that align with key Fibonacci levels. While air gaps aren’t always meaningful, they can be crossed quickly if the price breaks down.
The 0.382 Fibonacci level is a typical retest area in a strong uptrend, and the 0.618 level is an area of value.
The last consolidation lasted 18 months and retraced 38%.
Daily - Bottom
There is ongoing bearish divergence with the volatility-normalized MACD. I use slower MACD settings specific to time frames in my trading system, providing stronger confirmation of trend changes. Tight divergences on indicators are signals, while lengthy divergences are conditions. Signals prompt us to seek confirmation and act, whereas conditions matter but don’t specify when they will matter. Long divergences warrant more attention as trends progress.
On June 12th, there was a large gap up. Significant gaps appearing late in trends are typically exhaustion gaps.
We quickly moved into a consolidation. The triple top of the consolidation occurred at 100 trading sessions. Consolidations can be viewed as cycles. We typically observe a deviation from a consolidating base that is ¼ to ⅓ of the base's length. Sometimes, this is a break above the base that will retest. Sometimes it forms the popular cup and handle. In the weekly chart, we see a break from the 18-month consolidation followed by a second consolidation exactly ¼ the length, followed by trend continuation. If we resume an uptrend, I expect the current pattern to complete by mid-December, aligning with AVGO’s earnings release.
The red circle identifies where the price is failing to hold support at the anchored volume-weighted average price (AVWAP) from the all-time high.
The major moving averages are sloping downward, signaling that this is not safe for new buying in trend-following systems.
Intraday Chart - Upper Right
We have fallen below the month-to-date volume-weighted average price and the weekly VWAP.
ADX suggests that the strength of the downtrend is cooling on the intraday time frame.
Daily Chart - A Closer Look
The bottom indicator is custom-coded, combining three approaches into one.
TRIX is a triple-smoothed average of the log of price, providing a smooth and responsive way to see the rate of change and serving as a solid leading indicator of trend direction.
The Strength Oscillator is the average momentum of closing prices divided by the average of the high and low prices over a month. While a great directional indicator, it is very noisy on its own.
These are combined into one value and then normalized by volatility, resulting in an unbound indicator that shows when trends begin and conclude.
From 2019 through 2022, trend lines can show when support for an uptrend is broken, leading to consolidation, and when resistance in a downtrend is broken, leading to an uptrend.
Moving to 2023 to 2024, the indicator breaks resistance and signals an uptrend in mid-May 2023. This reflects sentiment leaning into the trend before earnings and the subsequent price spike.
We can analyze the remaining sub-trends, but the indicator's view for the remaining trend shows the strength of the combined formula over a longer time series:
Price is moving higher, but the indicator signals a weakening trend. This occurs when the strength oscillator weakens to consolidation and/or volatility increases.
The break below the lower trendline warns that the uptrend might be concluding.
A move back above zero will signal repair, and a higher high in the indicator will signal a new uptrend.
The price has fallen below the AVWAP from the prior high and the 100% retrace from a Fibonacci retrace from the last momentum crossover to the most recent high. A rebound from this level would be very constructive.
Note that movement below 0.786 is more likely to continue to 1.272. A deeper move to the 1.618 level is a normal area for the price to rebound. These levels are more significant when they align with a prior gap in price (June 12) or an area where an AVWAP is trending (as seen with the AVWAP from the strong mid-December 2023 candle).
The VIX
I would like to start with the regression channel and Keltner channel analysis of the VIX compared to the regression channel of the S&P.
The Keltner band extending above the channel signals heightened volatility. The Keltner rolling over from a peak always marks a local low in the S&P.
The Keltner channel has remained above the upper level of the regression, suggesting that we remain in heightened volatility. I start new regression channels when we see a volatility spike and a market drawdown.
This version of the chart uses the VIX alert I coded based on Andrew Thrasher's Volatility Tsunami paper. The red markers reflect extremely compressed volatility. In 70-75% of cases, these are followed by a VIX spike high within 30 sessions.
The mid-November low is a lower low and lower high relative to the August volatility spike, but it is a higher low relative to the trend through April. This trend can lead to corrections, as seen in 2020 and 2022.
We have to go back to the mid-1990s to find the last time the VIX gradually rose with the S&P during an extended bull run.
Higher volatility is normal seasonally (particularly in election years) and after changes to monetary policy regimes.
The following chart highlights shifts in rate policy. Light red begins a hiking cycle, and dark red ends a hiking cycle. Light green begins easing, and dark green ends easing. Volatility typically increases during transitions.
The indicator at the bottom is the standard deviation of the VIX and VVIX on which the Volatility Tsunami alert is based.
Seasonality in election years has the highest occurrence of ending October higher with an average increase of 24%. After the election year in October, volatility historically experiences the most consecutive month-over-month declines of the four-year cycle. This leads me to expect that our slightly heightened volatility is seasonal and temporary.
Lastly, this chart uses a Euclidean distance formula to compare the 5 CBOE VIX term structure indices from 9 days through 1 year. Lower readings indicate a narrower distance, suggesting the market expects a similar level of volatility across all timeframes. Highs and lows of the least squares moving average of this indicator typically coincide with the highs and lows of the S&P.
The line is then compared to the ratio of the S&P high beta ETF to the S&P low volatility ETF. Bearish divergences have a high likelihood of preceding a drawdown in the S&P. Most of these are brief and shallow. Drawdowns can occur without a signal, so the indicator only signals potential risk-off and does not signal risk-on.
Palantir (PLTR)
Palantir is a position I have been adding to. Here is a split expiration options play that I am following to optimize my cost basis.
PLTR is currently very extended. The MACD in this chart is normalized by volatility, based on a paper that won the Charles Dow Award twice. The signal line exceeding 150 indicates a trend at risk of exhaustion. While it doesn’t lead to a price reversal, an extension above 230 is rarely sustainable in the short term and offers a slight pullback.
We are heading into Thanksgiving week, which has a bullish finish. The week of December 13 is seasonally the most bearish week of December.
I like to buy and write the money-covered calls with a December 13 expiration.
April is one of the strongest months for tech in post-election years.
I like to buy $55 covered puts with an April 17 expiration.
Using current prices, this could result in an average cost basis of approximately $55/share, net of options premium. If preferring to sell the covered put when 50% of profit is reached, the average cost basis/share could be approximately $57 net of options premium.
