By Patrick Brik, BAS, CFA, CMT

Published: January 18, 2017

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Patrick Brik, BAS, CFA, CMT
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Gigamon Inc: The GIMO Stock Chart Foresaw This Sell-Off

GIMO Stock GIMO Stock: Getting Crushed

After the close of trading on January 17, 2017, Gigamon Inc (NYSE:GIMO) warned that its fourth-quarter results, to be released on February 2, are going to fall short of expectations. This shortfall is going to affect both the top and bottom lines, and as a result, both were guided lower. This shocking news caught investors off guard, and to show their displeasure, they sent Gigamon stock spiraling lower by 22.26% in after-hours trading.

For those of us who follow price trends, this severe reaction is actually not a total surprise. There were indications in late November that questioned the overall health of GIMO stock. When I speak of health in reference to a stock, I am referring to its trend.

For those not familiar with my work, I rely heavily on technical analysis to analyze potential investments and create applicable investment strategies. This style of analysis uses past volume and price data to discern trends and forecast future prices.

In late November, there were numerous technical signals indicating that a trend reversal had taken place, and these signals are illustrated on the following Gigamon stock chart.

gimo

Chart courtesy of StockCharts.com

2016 was a great year in terms of performance for GIMO stock as it yielded a return of 71.4%. This standout performance began in February as the Gigamon stock began trending higher.

The trend higher was extremely orderly and the use of an uptrend line, created by connecting the valleys on the stock chart, effectively captured this bullish trend. This trend supported the advance in GIMO stock for nine months, until that fateful day in November when price broke below this trend line, indicating that the bullish trend had ended.

This bearish view was reinforced that same month as the Moving Average Convergence/Divergence (MACD) indicator crossed in a bearish manner. MACD is an effective trend-following momentum indicator. Signal-line crossings are used to distinguish between bullish and bearish biased momentum signals. The bearish cross indicated that the bears had once again gained control of GIMO stock, and that the path of least resistance was lower.

These indicators confirmed that the trend reversal had taken place, and suggested that Gigamon stock was in the throws of a bear market since late November. For a technical trader, the bearish news that hit the news wires was not a total surprise because some sort of price weakness was expected.

The following stock chart illustrates where Gigamon stock can find its footing and possibly end this bearish trend.

gimoo

Chart courtesy of StockCharts.com

The Fibonacci retracement numbers are a tool favored by traders to identify where price support can be obtained. The most popular numbers eyed by traders are the 50% and 62% retracement levels. The theory surrounding these numbers is that after a stock completes its primary move, it will retrace it by approximately 50%-62% before resuming its primary uptrend.

The 50%-62% zone is what traders refer to as “the box,” and traders will be eyeing this area to enter long positions and/or cover short positions.

If the after-hours close is suggesting where Gigamon stock will trade tomorrow, then GIMO stock is set to open the trading day at $34.20, down 22.36%. This is within the confines of “the box” so perhaps a bottom in GIMO stock is near.

Under such pretenses, I would wait for price to enter “the box” and then I would look for a bullish price pattern before I assume any long positions.

Bottom Line on GIMO Stock

Gigamon stock is set to trade much lower on Wednesday January 18, because the company warned that its fourth-quarter earnings results are going to fall short of expectations. This bearish news was not a total surprise because a bearish trend in GIMO stock began in late November that suggested the health of company was in question.