Some of you have asked me: "why din't you take profits on the BRCM PCRCC already? after all, it is close to a 30% return in 3 months or so, that is more than most mutual funds." OK, I will never argue with taking profits. Too many times I have tryed to get a few more dollars out of a trade, and that usually ended in failure. Remember, your profits are always at risk.
I suggest we take a look at the BRCM Elliott wave count, so we can get an idea of what the possible movement on the stock will be in the next few months. The long-term forecast on BRCM is quite promising, and suggests that the most likely scenario is that BRCM will rally to over $100/share. However this is very long-term, and we are not absolutely sure when would that be reached. Let's just be happy with the projection in that it makes us bullish.
Note that a significant low in the stock was made in late 2002. So let's use that as the start of a more detailed analysis:
It may appear that BRCM is likely to go to somewhere between 45 and 80 in the months to come, a forecast that is bullish too. However, the minumum requirement for our count to be valid is almost met, so an unexpected reversal may be at hand. As you can see in the chart above, BRCM is tracing a zigzag (zz). The "C" wave of a zigzag does not have to equate wave "A" in time or price. The minimum length of C should be 61.8% of A. Wave A went from $10 to $47 (37 points). Wave B retraced back to $25. The minumum for the C wave would be 61.8%x37=22.9, added to the bottom of wave B (25+22.9), would set our minimum target at $48. The maximum reached by BRCM on the 22nd of July was $44.8, so we could expect another rally to new highs next week. Now remember that this is a minimum target by Elliott rules. The maximum expected for wave "C" is 161.8% of wave A.
Let's examine this wave "C" in more detail, and look for a possible completion of the pattern that started in August 2004:
RET has labelled this pattern as a double 3 (d3), which should conclude with wave "y" any time now. This is a mismatch to the zigzag defined in the larger pattern that started in 2002. The wave "C" of a zigzag should be a 1-2-3-4-5 series (impulsive). The d3 is considered an a-b-c series (corrective). IF you owned stock, this uncertainty should have pull you out of the market, but a proper options strategy could be actually profitable. My long-term chart suggests that BRCM may go as high as $120 in the months to come, while my short-term chart suggest that the rally may be over. Further, the recent jump in price along with a large volume spike suggests that BRCM may have some room to grow still.
PCRCC is still the ideal trade for this stock. Remember, the goal of a PCRCC is to prepare for a possible Volatility spike, while taking advantage of Delta and Theta gains as well. Our trade's profits are locked in Delta, so we could make a trasnformation of our trade that would release those profits and set up for a possible profits due to a volatility spike. Here is what I have done:
By selling the Nov 37.5 calls, I have effectively taking most of my profits off the table. However, I have also bought a larger number of Nov 42.5 calls. This increases my potential profits to the upside but also increases my potential profits to the downside.
Just to show that I am not making this up, here is the trade I made in my account:
Notice that the resulting trade would benefit from a volatility spike, as your typical PCRCC would. My profit target is $8000 or more whether the stock goes up to 50 or down to 30. We'll see. Hopefully, my Elliott count will be clearer later. I hope this is clear, but I DO look forward to hearing your comments.
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