There is a lot to cover in a stock like QUALCOMM, Inc. (NASDAQ:QCOM). However, the only issue we are really concerned about (at least, in the short term) is royalties.

Over the last few months, there have been a couple of shocks to QCOM’s share price that were largely related to issues over the company’s royalty revenue. In early November, QCOM dropped following an earnings report that disclosed that both the FTC and regulators in the European Union were investigating QCOM’s licensing practices. That shock was then followed by a poor report on Jan. 28 that lacked any significant improvement in processor sales or licensing royalty revenue.

Some investors might be surprised to learn that QCOM doesn’t just produce chips and hardware for phones and other electronic devices. They also essentially own the technology behind 3G networking. Although their 3G patents aren’t as comprehensive as today’s 4G technology (LTE), most phones that can access 4G networks are also 3G backwards compatible, which puts QCOM in a strong position. Or, at least, it used to.

QCOM licenses their patented technologies to manufacturers for a royalty based on the price of the phone or device. 3G and 4G licensees pay between 3%–5% of the price of the phone they manufacture to QCOM for the right to use their patented technology. However, technology monopolies like this tend to run into regulator trouble. For instance, QCOM finally settled its disagreement with China this month and announced they will pay a nearly $1 billion fine, and they will cut their royalty collection rate by 35%.

This “bad news” was actually a little better than many investors had feared. But we think this is a red-herring that distracts from the real issue that QCOM faces near-term. The problem isn’t that QCOM won’t be collecting as much in royalties from Chinese manufacturers in the future because of a settlement with regulators. The real issue, we believe, is related to “Moore’s Law,” which predicts technology trends.

Gordon Moore was a co-founder of Intel Corporation (NASDAQ:INTC) and predicted the rate at which transistor use would increase in processors over time. Specifically, he expected the number of transistors in a processor to double every 18 months. That trend has mostly proven to be true —so much so that the semiconductor industry has adopted it for development planning purposes. (Versions of Moore’s Law are used to predict the rate at which the price of processors will decline as well.)

So here is the problem for QCOM: Phones are getting cheaper, and alternative processors are getting better. Handsets produced by Xiaomi — already outselling Apple Inc. (NASDAQ:AAPL) in China — Coolpad, Oppo and India’s Micromax are much less expensive than the Samsung, LG, and Apple devices we mostly use here in the United States.

Why is this a problem? If Xiaomi can produce a 3G smartphone for $130, then QCOM’s royalties are calculated off of a much smaller base —in the largest emerging markets in the world.

We think QCOM has a great moat and good sources of revenue for the future. To be clear, our contention is not that QCOM will go out of business because handsets are getting cheaper. However, we do think that QCOM is overvalued because the pace at which handset prices are falling has been underestimated by U.S. and European analysts. This is especially important to understand when you consider that steady royalties have consistently insulated QCOM from emerging problems in its processor business.

This is why we think QCOM’s current rally is overpriced and will ultimately turn into a dead-cat bounce as the share price approaches $70 per share. As you can see in the next chart, the stock pretty much reached that level on the Chinese-settlement announcement. A dead-cat bounce like this is actually not that uncommon and is a pretty solid bearish signal if the subsequent fundamentals back it up. You can see a very similar scenario playing out on QCOM in October 2014, when the stock was unable to break through the July gap.

Qualcomm (QCOM): Chart courtesy of eSignal

In light of the market’s general bullishness, we think it makes sense for the bounce to be confirmed with a break back below $68 per share. Our initial target would be the low prior to the bounce at $62 per share.

One thing to note: QCOM will be presenting to analysts on March 2, which may lead to some additional volatility. It would not be unusual for even relatively benign comments from management to send the stock into wide price swings.

InvestorPlace advisors John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.

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