Editor’s Note: James Brumley is filling in for Serge Berger today.
Congratulations are in order for traders who owned Pixelworks (PXLW) anytime before Wednesday’s open. Thanks to an encouraging rumor that the video display-panel maker was working with Apple (AAPL) on a new product, PXLW stock jumped nearly 15% in yesterday’s trading.
Yet, with nothing left to play for the encore — in addition to the fact that there’s no room left for higher highs — the smart-money move with Pixelworks at this point might be locking in gains on any long trades and placing bets on a downside move from PXLW stock.
In the interest of complete clarity, neither Apple nor Pixelworks made any statement on Wednesday that would have sparked such a surge from the stock. The commentary in question was a third-party editorial posted at Seeking Alpha. The op-ed simply suggested (based on what the article’s author could glean from Pixelworks’ recent SEC filings) Apple was already using Pixelworks processors in the iPhone and the iPad, and that the two organizations are now likely co-developing a smart TV.
The author’s final assessment? PXLW stock is ultimately worth $22 per share, which still is more than 150% above Wednesday’s closing level.
In cases such as this, the accuracy of the conclusions is largely irrelevant … at least initially. The market becomes immediately infatuated with the premise, and bids the stock up sharply. Far too often, though — when cooler heads prevail the very next day — traders recognize the idea is little more than a guess and that it could be months before the truth comes to light. The re-injection of doubt into the scenario proves to be a drag on the stock, unwinding the knee-jerk bullish reaction as quickly as it developed.
This is very likely to be the cycle PXLW stock is in the midst of right now.
PXLW Stock Charts
In the case of Pixelworks, however, there’s an even stronger technical context suggesting shares could quickly turn cold after heating up on Wednesday.
In the daily time frame, the sharp run to a high of $9.19 on Wednesday suspiciously tested a key high hit in early March before Pixelworks gave up about a third of its intraday advance. The March surge peeled back immediately and decisively, and yesterday’s jump has dropped hints it wants to follow that same course.
In the weekly time frame, we can see PXLW stock bumped into the upper boundary of a loosely-defined, long-term trading range on Wednesday. While the rising range itself suggests that Pixelworks is in a bullish mode, that bullish mode has yet to prevent the stock from making several trade-worthy pullbacks since last year.
Pixelworks might find modest support around $7.30, where it has made lows over the past three weeks. The $6.20 area, however, appears to be the most plausible target area at this time. We’ve seen that line serve as support as well as resistance since April, and the 100-day moving average line (which has also been a frequent floor lately) will reach that area soon.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.