In the first three months of 2023, Arista Networks (ANET) rallied a massive 58%.
That strong surge put it well into overbought territory.
After peaking on March 23, ANET drifted lower, making a series of lower highs. Even strong earnings in May failed to stop its slide with ANET gapping lower.
Yet we checked in on it in early May (red arrow in the chart below) just after those results. And our indicators were telling us that ANET was looking oversold…
For ANET to rally, it needed to hold a key level…
So far, it has… And ANET has rallied strongly.
Today, I want to see what’s coming next…
All-Time Highs
The chart below shows ANET’s strong rally since June last year. Although you can’t see it here, that rally began back in March 2020.
Throughout, ANET has made a series of higher highs (‘1,’ ‘2,’ ‘3,’ and ‘4’). The longer-term 50-day Moving Average (MA, blue line) steadily trended higher too…
Arista Networks (ANET)
Source: e-Signal
Each of the rallies up to those peaks coincided with two bullish signals…
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After making a ‘V,’ the Relative Strength Index (RSI) rallied from oversold territory (lower grey dashed line). That rally gathered strength as the RSI broke through resistance (green line) and into the upper half of its range.
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The up move got confirmation with the 10-day MA (red line) breaking above the 50-day MA.
Yet those rallies peaked and then reversed when the RSI rebounded lower from overbought territory (upper grey dashed line).
We saw this pattern when we checked in on ANET on May 9…
Take another look:
Arista Networks (ANET)
Source: e-Signal
As you can see, ANET’s downtrend coincided with the RSI falling. That move accelerated as the RSI broke down through support after ANET’s Q1 results.
We were looking for the RSI to build support and start tracking higher. That would give ANET a chance of rallying.
We need to see the RSI make a decisive move higher… just as we have now seen here (orange line). The RSI returning to its upper band saw ANET jump to fresh all-time highs.
Yet it has once again reached overbought territory.
So what can we expect from here?
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Decisive Moves
When the RSI is in oversold territory, there is no guarantee that a stock will bounce.
The same applies when a stock is overbought – there is no guarantee that a stock will fall.
Instead, the RSI needs to trend decisively down (just like we saw in March through May). And that downward momentum must follow through into the stock price.
For any extended down move beyond that, we’ll need to see the RSI break down through support.
The other thing I’m watching is our MAs…
As we saw with the previous rallies, the 10-day MA breaking above the 50-day MA confirmed the up move.
With this current move, the MAs have yet to crossover. We’ll next need to see the 10-day MA break higher and accelerate above the 50-day MA if this rally is to develop further.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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