One stock that’s ridden this year’s big tech resurgence is Arista Networks Inc (ANET).
ANET started the year strong with a nearly 60% rally in the first quarter…
However, when we last checked in on it in early April (red arrow in the chart below), it was showing signs of overheating.
Since then, ANET has steadily drifted lower.
And even with the release of a strong earnings report a week ago, ANET has gapped lower.
It’s now testing a key level. So, today, I want to see what’s in store from here…
Momentum Reversal
The chart of ANET below shows a classic uptrend in action…
The 50-day moving average (MA, blue line) has steadily climbed since mid-2022 as ANET made a series of higher highs and (higher) lows.
ANET’s rally then began to accelerate as we rolled into 2023…
Arista Networks Inc (ANET)
Source: e-Signal
Each of those rallies to higher highs began with two common bullish signals…
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The Relative Strength Index (RSI) formed a ‘V’ (red circle) and rallied from oversold territory (lower gray dashed line). ANET then rallied as the RSI began to move higher.
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The 10-day MA (red line) broke above the 50-day MA, confirming the up leg.
We saw this pattern with ANET’s rally to the August 2022 peak (‘1’)… the move to the December peak (‘2’)… And most recently in the rally to the all-time high it set in March this year (‘A’). Note how both MAs moved sharply higher in this last rally after they crossed over…
ANET topped out at ‘A’ with the RSI deep into overbought territory (upper gray dashed line).
When we last checked in on April 3, I noted if the RSI continued to track lower that we would likely see ANET drop further…
At the time, the 10-day MA looked as though it, too, had topped out. From there, if the 10-day MA crossed down below the 50-day MA, it would have further confirmed any down move.
And that’s exactly how things played out…
The RSI has steadily fallen from its all-time high (orange line). And following the market’s negative reaction to ANET’s earnings last week, the 10-day MA fell sharply below the 50-day MA.
With the RSI now in oversold territory (far right red circle), what am I looking for around here?
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Building a Base
The RSI has gone into oversold territory… But it doesn’t necessarily mean ANET will bounce.
For ANET to rally, the RSI needs to establish a base and steadily move higher.
The next test would see the RSI break through resistance (green line) and re-establish itself in the upper half of its range…
This, along with the 10-day MA crossing back above the 50-day MA, could see ANET fill in the gap from its May 2 earnings report.
But this move isn’t guaranteed…
If instead the RSI tracks sideways and remains stuck in its lower band, ANET will remain vulnerable… And that will potentially set it up for another leg down.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict