A few weeks ago I noted that Sirius XM (NASDAQ:SIRI) was in technical territory that buyers and those looking to go long should consider a gift. I posed the thesis that while there were many bearish signs from a technical standpoint that the equity it was also a great opportunity to buy.  In that piece I spoke of the essential events that would start to indicate a reversal of the downward trend.  Those that watched these key areas were not taken totally by surprise when the reversal occurred.  In that article I noted:

"From a technical standpoint Sirius XM is exhibiting very bearish behavior. Rather than express anger, invent some conspiracy theory, or scream about the shorts, investors who believe in the overall prospects of the company should look at this as an opportunity. While everyone else is spending hours trying to figure out which market maker is manipulating the stock down today, savvy investors seek out the tidbits of information that help them see where the bottom might be and increase their odds of being on the right side of the trade."


"Looking at the EMA chart we can see that the moving averages are all beginning to converge. When this happens it means that the stock has started to find a level from which a reversal can happen. Also note that the 50 day EMA ($2.03) is now below a key resistance point ($2.05), the 20 day EMA ($1.92) is below another key resistance point at ($1.98), and the 13 day EMA ($1.89) is below a new key resistance point at ($1.86). What I would like to see as these EMA's converge is each EMA to approach the next level down on low volume. To me this would be the perfect recipe for a reversal."

I also noted a strong potential to test $1.70.  The ingredients for the test of $1.70 never transpired, but the ingredients for a reversal were being exhibited in a classic manner.  Now that we have seen the move it is time to take measure of the strength of it.  This needs to happen one step at a time as there are other forces at play here as well.

From an Exponential Moving Average (EMA) standpoint Sirius XM is getting stronger with each passing trading session.  The 5, 15, 20, and 50 day moving averages are converging thanks to strong sessions on good volume.  In fact, the 13 day and 20 day moving averages are nearly identical, meaning when the next bullish indicator happens we will see both of these key elements pass above the 50 day average.  When that happens all EMA indicators will be bullish, and event we have not seen in quite some time with Sirius XM.

So the natural questions are:

  • Where does Sirius XM go from here?
  • Is it time to sell?
  • Can the company test new highs?

No one has a crystal ball.  Even those that think they have an awesome record actually do not.  In fact it is almost humorous how selective memories can be, but that is a subject for another day.  It is typically only selective memory that has some thinking that they are in the category of stock picking gods.  The reality is that the markets require a watchful eye, and trying to guess price points too many steps in advance is a fools chase.  If I tell you this stock will reach $2.60, I will some day be right.  But what happened in between now and then?  That is where the money is made.

From a technical standpoint it would appear that the real challenge for Sirius XM is getting above a very strong resistance of $2.16.  There is a moderate resistance at $2.10 and so far today the company has not been able to break through.  However, that level should fall within a short time frame.  Any positive catalyst, including some resolution on the situation with Liberty Media (NASDAQ:LMCA) could drive this stock into testing $2.16.  After that the next real test is at $2.26 and that resistance is only moderate.

So if the stock is possibly headed to $2.26, why should anyone consider selling?  That answer is simple.  It is the same basis by which savvy investors considered buying when this equity was exhibiting bearish behavior yet the EMA's were converging.  The idea is that you want to be a step ahead of the moves.  That does not mean to run out and sell today.  What it means is to watch the indicators closely as new ranges and trends are establishing.  In my opinion we will approach a range where it may appear that the technical signals begin to stabilize, and that is where news flow enters the thought process.

Stepping aside from the technicals a moment, we  need to consider the news flow.  July should actually have more news than normal thanks to Liberty Media, its forward contract, and the application with the FCC.  Other factors include a strong quarter in auto sales and the anticipation of Sirius XM's quarterly report.  There are a few major considerations here:

  • There is an overhang of sorts relating to Liberty Media.  It seems a foregone conclusion that Liberty will gain control, it is now simply a matter of when.  Uncertainty is never good for an equity.  Resolution or added information will help fill in the blank spots regarding Liberty.  Almost any news on this front is good news.
  • Auto sales were strong in the quarter.  In fact, they were strong enough that some may think Sirius XM will raise guidance.  I do not quite see that yet, but it should be crystal clear that Sirius XM will at least meet subscriber guidance very soon.  That news alone should help the street better understand the growth prospects of the company.
  • Sirius XM is now handling the NOL's a bit differently.  They are actually using them now and beginning in Q2 will be accounting for them.  This will help the financials out in a very positive way
  • With limited capex expenditures Sirius XM can present very healthy numbers.  This will show in a crystal clear manner in the Q2 report.

Can Sirius XM test new highs?  In my opinion it is a distinct possibility.  Combine the technical information with the timing of news and we could set up a miniature perfect storm.  There are a few key factors to look at though.  Sirius XM has not offered up any real guidance for 2013.  This means that the street is still basing much of its opinion on 2012.  When we get an idea of free cash flow and EBITDA from the company on an official basis there will be another new dynamic at play.  When Sirius XM trades at about $2.25, it is trading at a very high EV/EBITDA multiple.  Whenever that multiple gets to the high end of the range things tend to stagnate a bit.  If the street has official guidance for 2013 that it can wrap its head around, the multiple will immediately not be at such a premium.  This gives the equity a bit of breathing room to appreciate.  Investors that understand this will be better prepared on what might trigger a selling point.

Key Points:

  • Watch for moves that happen on above average volume.  If volume weakens, the conviction behind the move is weaker.
  • Watch $2.10, $2.16, and $2.26 closely.  Passing these levels on good volume is essential in building stronger support levels.
  • Watch the news flow, and better yet anticipate it.  For example, Liberty is supposed to close their forward purchase deal this week.
  • Watch the quarterly report closely and how the market reacts to the news.
  • Pay attention to mid-month auto sales forecasts for July
  • Develop your strategies today so you can act with conviction tomorrow.