AMBA Stock: Falling Knives
Ambarella Inc (NASDAQ:AMBA) reported earnings after the close of trade on December 1, 2016 and, while it did beat both on the top and bottom lines, this semiconductor-maker disappointed with the forward guidance that it delivered. As a result, AMBA stock was trading lower in after-hours trade.
Ambarella’s forward guidance actually sent some shivers down my spine as it is poised for its first-ever decline in sales. Slowing growth for a company that is labeled a growth company is downright miserable. As an investor, such words just make me cringe. Given that Ambarella generates about 30% of its revenues from GoPro Inc (NASDAQ:GPRO)—and it’s no secret the problems that GoPro is currently enduring—this news should not really come as too much of a surprise to investors.
To make matters worse, the NASDAQ index has been under selling duress in the last few days. Growth stocks as a whole have been underperforming the general market. Evidence of this relative weakness started to show its head following the presidential election. Markets have surged to new all-time highs, but growth momentum names have not followed suit.
This lack of participation is a cause for continuing concern, as investors continue to rotate money out of growth names and into cyclical stocks and financials.
AMBA stock is expected to trade lower, given the disappointing guidance, and disappointment in this climate can lead to a significant sell-off. It is wise to be prepared and see where constructive support can be found. If constructive support holds, then that increases the possibility that the bull market in Ambarella stock that I identified in my previous report on the company is still intact. Failure to hold would mean that lower prices and a bear market are set to prevail.
The following Ambarella stock chart illustrates the constructive level of support.
Chart courtesy of StockCharts.com
When I refer to support as constructive, I mean it in the context that, if this level of support holds, then it increases the possibility that the prevailing trend of higher prices will continue.
In order for AMBA stock to remain constructive, the price will need to remain above the 200-day moving average. This moving average is the dividing line between stocks trading in a bull market versus stocks trading in a bear market. When the share price is above the moving average, it is bullish. When the share price is below the moving average, it is bearish.
The slope of this moving average is also used as an indicator. An upward-sloping moving average indicates that a bullish trend and a downward-sloping moving average indicates a bearish trend.
The upward-sloping moving average increases the possibility that Ambarella stock could remain above the 200-day moving average.
The following Ambarella stock chart illustrates an indicator that has done a great job at marking inflection points.
Chart courtesy of StockCharts.com
Moving average convergence/divergence (MACD) is a simple and effective trend-following momentum indicator. Signal-line crossings are used to distinguish between bullish and bearish signals. This indicator has identified bullish and bearish markets with great precision. I used a weekly scale to chart this indicator because it acts to smooth out this indicator, and it reduces the number of signals that are generated. This is instrumental in catching the longer overall trend and omitting the minutiae.
In February, a bullish MACD cross effectively called the bottom in AMBA stock, and in October, a bearish MACD cross called the top.
If I were looking to invest in AMBA stock, I would use this indicator and wait for a bullish cross to generate. I am not interested in trying to catch a falling knife.
Bottom Line on AMBA Stock
A disappointing earnings report is going to send Ambarella stock lower. If the price can remain above the 200-day moving average, this will increase the odds that a bull market is still intact. If I were looking to invest in AMBA stock, I would wait for the proper signal, and avoid trying to call a bottom.