NTGR Stock: Testing Support
On October 21, 2016, I released a report covering NetGear, Inc. (NASDAQ:NTGR) stock, titled: “Cisco Systems, Inc.: Forget CSCO stock, NetGear is Better.” As the title explains, I outlined key details why I believed that NTGR stock was a better investment than Cisco Systems, Inc. (NASDAQ:CSCO) stock. In that publication, I went out on a limb to suggest that if Netgear stock would ever trade back to test the $45.00-$47.00 level, this would provide a tremendous buying opportunity.
That opportunity is now at hand as Netgear hit a low of on $44.75 on April 27, following its earnings report that saw it beating on both the top and bottom lines. The selling pressure that pushed shares lower by 9.64% stemmed from the disappointment regarding a squeeze on its margins going forward.
To quickly clarify for those who have not had the pleasure of reading any of my previous publications, I use price charts to generate investment views on a stock or company. This method of investment analysis is know as technical analysis, and it is based on the notion that historical price and volume data can be used to discern trends and forecast future prices. This may sound like a silly notion, but I have found great value in this method of analysis, and it is why I have been focusing on it for the better part of almost two decades.
The following price chart illustrates why the $45.00-$47.00 price point is significant.
Chart courtesy of StockCharts.com
The price chart above illustrates that there is a distinct level of price support at the $45.00 price point. This level of support was a previous level of resistance. In June 2011, Netgear shares attempted to break above this level, and after a failed attempt, a sell-off quickly ensued. It took almost five years to return to this level, and in December 2015, the $45.00 level once again proved to be a formidable level of resistance, and another sell-off quickly ensued. It wasn’t until June 2016 that NTGR stock was finally able to push through this level of price resistance.
The theory surrounding support and resistance states that once a significant level of resistance is finally broken, it becomes a significant level of price support. Netgear shares have returned to test this level of support from above. I refer to this type of price action as a “backtest.” A successful backtest would involve price quickly bouncing off this level and remaining above it. This type of price action would serve to reinforce that the break above resistance was legitimate, and that the path of least resistance remains geared to the upside.
My bullish view on NTGR stock is predicated on its ability to remain above this level of price support. Falling below it would negate my bullish view. This level of support is within the context of bullish price action, which is illustrated on the following Netgear stock chart.
Chart courtesy of StockCharts.com
The bullish run off the lows in the aftermath of the financial crisis has been characterized by constructive price action. Constructive price action consists of an alternating wave structure of impulse waves and consolidation waves.
The function of an impulse wave is to advance the stock price in a linear motion. The function of a consolidation wave is unwind any overbought conditions that were created during an impulse wave, and more importantly, set up the next advancing impulse wave. These waves are essential in creating a sustainable trend as they feed off each other.
An impulse wave took the price of NTGR stock from a low of $8.44 to a high of $45.31 in a little under 2.5 years. During the next five years, Netgear stock traded in a range-bound consolidation wave that served to unwind any overbought conditions that was created during the impulse wave.
In November 2015, NTGR shares exited the consolidation wave in an upward direction, suggesting that a new impulse wave was set to develop. The initial surge out of the consolidation wave ran into resistance at the $45.00 level, and shares backed off to find support on the trend line that served to define the consolidation wave. This was a successful backtest as Netgear shares quickly returned to break above resistance and an impulse wave did in fact develop as suggested.
Returning to test $45.00 could be a cause for concern, but Netgear has a habit of returning to test levels of resistance from above. As a result, I will view this price weakness as bullish as long as price remains above $45.00.
NTGR’s habit of returning to test previous levels of resistance is why I outlined in my previous report that if price would ever return to test this level from above, I would view it in a bullish light. I believe that returning to test this level of support is a bullish opportunity in which a conservative strategy can be applied by taking the appropriate risk measures.
Bottom Line on Netgear Stock
Netgear stock has just returned to test a significant level of price support. As long as NTGR stock remains above this level of price support, I will have little recourse but to view this investment in a bullish light.