Shares of semiconductor maker Micron Technology (MU) lost 6% Thursday after large competitor Samsung (SSNLF) said it would increase DRAM production. The selloff in Micron stock caused some technical damage as it fell out of a multiweek consolidation period that had topping characteristics to it, and also finished the day below near-term support levels.
Active investors and traders can now look to short Micron stock with defined risk.
In its quarterly results, Samsung reported 10% growth in memory sales and upped its DRAM production. As we live in an ever more interconnected world — particularly in the technology space — news of one manufacturer increasing or decreasing production can quickly infect competitors’ stocks around the globe, which is exactly what happened to MU stock yesterday.
The Philadelphia Semiconductor Index (SOX) already dropped below near-term support levels last week, and by so doing a) gave us early warning signs that other stocks in the space might be due for a better correction and b) might itself have completed at least a medium-term topping pattern.
Semiconductor stocks as a group have the tendency to act as a leading indicator for the broader stock market, which is why I always make a point of keeping a close eye on these stocks. Furthermore, chip stocks have a tendency to trade in a somewhat volatile fashion, which often makes them good stocks to trade or at least actively invest around.
Micron Stock Charts
Looking at the multiyear weekly chart of MU stock, note that in March 2013, Micron broke out of a multiyear wedge, which led to a steep rally. In fact, Micron shares rallied about 550% in less than two years — no small feat considering MU’s large-cap status, but also most likely too much too soon.
On the daily chart, note that although MU stock dropped below its 50-day simple moving average on Thursday, it already fell out of its uptrending channel (black parallels) last week. Furthermore, Micron’s stochastic oscillator began topping in June while price continued to ascend until mid-July, thus having flashed negative divergence and further adding to the probabilities that the July high was a more important medium-term high.
Tactically, Micron stock might have another dead-cat bounce left in it that could take it back into the low to mid-$30s, but through a medium-term lens, MU is now more than ripe to settle into a more meaningful mean-reversion move that could take it into the mid-$20s in coming weeks/months.
From a risk/reward perspective, active investors and traders should stand a better chance for a profitable trade on the short side with MU if they shorted it on an oversold bounce, as opposed to shorting it into a selloff.
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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.