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Ask The Trader
Wednesday, May 23, 2001

Comments On MRVC

Hey guys. You should look at MRVC and write some comments about it. The last two days the stock had an impressive performance.

Thanks, Valentina

MRV Communications (NASDAQ:MRVC) is a classic example of a cup and handle breakout. Since the market so called "bottomed" in April, these bullish breakout patterns have been rampant across many different sectors.

The key to profiting from this breakout pattern is to catch it early. This is because once prices clear the top of the handle they usually react powerfully to the upside (as in the case of MRVC). The ideal buy point is within 2% of the top of the handle. If the stock doesn't respond to the breakout and falls back, at least you have support just below at the top of the handle.

Turning to MRVC's chart, we can see that volume on the breakout confirmed the breakout move. However, MRVC moved too far too fast, as it quickly traded up to resistance at $13.75 only a day later. Add to this the fact that the price target on MRVC (according to the depth of the cup) was $13.50 and you have the perfect recipe for a pullback. Whether MRVC holds up at support around $10.50 remains to be seen, but a 49% move in two days, by anyone's standards, is an overbought condition that deserves a pullback.

The good news for MRVC is that volume is tailing off as the stock settles back towards the $11 level. If it can hold above $10.50 and move sideways, it may have a good chance at forming a flag pattern, which may lead to another breakout down the road. For now, I wouldn't touch MRVC unless it can break above $13.75 on volume near 5 million shares.

Good Luck and Have a Profitable Trading Day

Craig Seidler
Assistant Editor

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