We’ve opened a new bearish trade on Micron Technology (MU).
China’s surprise move to devalue the yuan has reinvigorated fears that the Chinese economy is slowing down — a fear that sent shares of Micron Technology plunging in early July after the company reported not only that it had missed both revenue and earnings guidance but also that it thought its fiscal fourth quarter was going to be much weaker than expected.
Analysts originally thought Micron Technology would see revenue of $4.16 billion in the fiscal fourth quarter, but management issued guidance of $3.45 billion to $3.7 billion. With around 55% of Micron Technology’s revenue coming from China, any sign that the Chinese economy might be slowing down could be fatal to MU’s share price.
Adding to the bad news out of China, Drexel Hamilton downgraded Micron Technology last week, citing China-based mobile and communication infrastructure suppliers that are pushing out their new orders on account of larger-than-expected inventory builds. If new orders decline, we think that even MU’s weak guidance will be too optimistic.
With revenues declining and development costs rising, we think the consolidation range that has been forming on MU’s chart between $17 and $20 will be confirmed as a bearish continuation pattern, especially as the stock closed below $18 Tuesday. We expect Micron Technology to drop at least to $15 — the resistance level the stock faced in summer 2013 — with a potential drop toward $12.50.
The best way to trade the slide in Micron Technology is:
‘Buy to open’ the MU October 17 Puts (MU151016P00017000) for a maximum price of $1.30.
InvestorPlace advisers 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 SlingShot Trader trade and get 1 free month today by clicking here.
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