Chip-maker Intel (INTC) on Tuesday reported strong second-quarter results and highlighted good growth in its PC business. The stock jumped in a big way Wednesday as a result, extending the already steep rally of recent months — and driving INTC stock to extreme overbought levels. The stock needs a breather, and active investors may find opportunities on the short side.
Specifically, Intel beat on the top and bottom lines, and sales jumped 8% over the year-ago period. The surge in mobile devices has hurt the PC market in recent years, so seeing at least marginal improvements in the PC segment is good news, as an upgrade cycle at some point is inevitable.
Intel also announced that it is looking to add another $20 billion to its stock buyback program and that it will buy $4 billion in Intel shares in this current quarter.
A mix of good top-line revenue news and a confidence-inspiring stock buyback program were enough to spur analysts to upgrade INTC stock. The sum total of all this cheery news was a lift of more than 9% Wednesday … a move that has left INTC stock with a near-vertical slope on its charts, which now offers weak risk/reward for bulls looking to chase the stock higher.
Note on the weekly chart that over the past decade or so, INTC stock has carved out an ultra-bullish base that still promises much higher prices — over a multiyear period. But since the stock broke past horizontal resistance in June, it has never looked back. INTC stock is thus increasingly vulnerable for a retest/mean-reversion move back to the breakout line near $29-$30. Also note that the Relative Strength Index recently reached new highs and is now well overbought.
On the daily chart INTC stock has now had two impressive upside gaps since June, without any mean reversion or even consolidation move. The stock is now also trading 35% above its 200-day simple moving average (red line), which historically is very stretched.
Active investors and traders could consider selling out-of-the-money call spreads, or wait for a bearish reversal signal and short the stock outright. A mean-reversion move back toward the $30 area looks increasingly likely — sooner rather than later.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.