"Narrow
gates admit few."
-- Christina Nikolov
Brand Loyalty
by
Christina Nikolov, Founder ChartWatchCentral
Stock/Ticker: Avocent Corp. (AVCT)
Date: February 28, 2003
Opinion: Bearish
Current Price: $27.82
Target Price: $24.00, the possibly $19.24 and $14.94
Commentary:
After bottoming on October 11th, shares of Avocent Corp. (AVCT) soared more than 135%. Since the end of 2002, AVCT rose more than 25%, while the NASDAQ Composite rose less than two-tenths of a percentage point.The strong year-to-date performance can be partially attributed to a good earnings report on January 30th. In that filing, the company announced that in 2002, gross profits rose $13 million, to $133 million. Over the same period, gross margins soared from 46.9% to 51.1%. As the shares continue pushing higher on the heels of strong fundamentals, we think it's important to resist any temptations to enter a long position at this juncture.
During the past two months, AVCT traced out a very clear rising wedge. (charts #1 and #2). Even though this particular formation touts one worst performance records, since approximately 24% fail, we are not scared. After all, reversal patterns need something to reverse, and AVCT enjoyed a tremendous rally leading up to the wedge.
Meanwhile, AVCT is also dangerously overbought on a monthly basis. Since early 1999, there have been four other occasions in which the shares were overbought on a monthly basis. All preceded substantial declines. (chart #3)
To profit from a decline, we suggest the following options: The May 30 put (Symbol: QVXQF) and the August 30 put (Symbol: QVXTF), which are currently offered at $3.90 and $5.10 respectively.
Chart(s):
#1) Avocent Corp. (AVCT) Six Month Daily Chart
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#2) Avocent Corp. (AVCT) Two Month Daily Chart
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#3) Avocent Corp. (AVCT) Six Year Monthly Chart
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