Technical Analysis: Vocera Communications (NYSE:VCRA)

Today we’re looking at the price action of telecommunications company Vocera Communications (NYSE:VCRA).

A bit about the company, they provide primarily provide telecommunications services to the healthcare industry, with the goal of keeping different departments in communication. They’re a small-cap company, with a market cap of roughly $800MM currently.

I’ll be performing technical analysis through the lens of George Douglas Taylor, author of The Taylor Trading Technique, whose work was expanded on by Linda Bradford Raschke. We’re looking at might happen in the next 2-3 days or the next “leg.”

Long Term Trend

I always like to start at the top and work my way down when it comes to time frames. Let’s take a look at Vocera’s weekly chart and see what it tell us.

The stock has been in a downtrend since their February 2019 earnings report, which evidently, the market wasn’t a fan of. Shortly after the report, the stock settled into a consolidation pattern (marked by the purple channel), not doing much for a few months until July, which brought a breakdown out of the range, leading to a multi-month downtrend.

In the past two weeks, Vocera experienced the first bullish price action the stock has seen since 2018, where an aggressive bounce off support (red line) to the upside has almost brought the price to the 20 week moving average. The downtrend started by February’s earnings report still hasn’t been broken, this swing high could easily just be a lower high within a long term downtrend.

The stock’s test of the $29 level, a previous support level, will be telling.

Reversal on the Daily Chart?

Moving down to the daily chart, things get much more interesting.

 

VCRA looks to be gearing up for an extended run, which is marked by Raschke as seven consecutive closes above the 5-day simple moving average. So far, we’ve seen six consecutive closes above the 5-day SMA, with today’s close being the most decisive.

According to Raschke’s modeling of extended run scenarios, the trend has a roughly 50% chance of persist, but the winning trades are much larger than the losers when the trend does persist.

An extended run usually follows two types of scenarios: a failed breakout, or the formation of a tight consolidation pattern. As you can see in the daily chart above, the stock tried to breakdown below the red support line but was rejected, which lead to this possible extended run scenario.

We can see that the 2-day rate of change is also ticking up, showing convergence between momentum and price action. A key principle of Raschke is that momentum precedes price. So the uptick in the rate of change gives us the additional conviction that the trend will persist. Of course, we have to wait for Monday’s close to see if this will be considered an extended run.

The strength of the price action alone might indicate a change in trend, however, we have to see how the market will react as it approaches the $29 level, which will serve as a level of resistance.

Finding an Entry

This stock could set up for a good reward/risk scenario with an extended run, but the question remains: where do we enter the trade? Seeing as the price has extended itself a bit from the 5 SMA, its probably not prudent to enter at these levels. Raschke has two different entry points she likes to take in this scenario.

The first is using the 5 day SMA as support and entering when price pulls back to the 5 SMA without closing below it. This gives you the best reward/risk, as your stop is going to be the first close below the 5-day SMA, which your entry will be very close to. The drawback of this is that the market might never pull back to give you the opportunity to enter at the support. The strongest trends don’t tend to have many pullbacks.

The second entry is waiting for two consecutive trading days that trade high to low. To simplify that, you’re looking for two consecutive red candlesticks that still close above the 5 SMA.

Raschke and Taylor have both probably used their discretion to enter trades without the above entry catalysts taking place, but it’s usually best to stick to a framework unless you really have a reason to break from it.