Are you a bull or a bear? After Wednesday, the question begs asking. But when it comes to semiconductor stocks Qualcomm (NASDAQ:QCOM) and Broadcom (NASDAQ:AVGO), walking the aisle and using a pairs trade in an uncertain trading environment with promising price trends in each looks like the smarter position to take.
Let me explain.
Wednesday’s forceful broad-based move — compliments of dovish interest rate remarks from the Federal Reserve’s Chairman Jerome Powell — had investors in a holiday inspired buying mood. But in a still-tricky trading environment, that shouldn’t dissuade investors from a pairs trade in QCOM stock and AVGO.
The reality is Wall Street still has trade war worries to contend with. Investors are also still faced with the possibility of a peak in corporate earnings growth, as well as an overvalued market following a historic rally of nearly 10 years. Still, even if those problems become less threatening to investors, a well-managed pairs trade in QCOM and AVGO stock is poised to capture big profits with reduced risk.
Go Long QCOM Stock
QCOM stock has been a bear to trade. Actually, let me rephrase that. Qualcomm has been a great trade for both bears and bulls willing to fade breakouts, breakdowns and the general trend at hand.
Since bottoming nearly three years ago, shares of this semiconductor stock are up a bit more than 30%. The gain in Qualcomm shares is nothing to sneeze at in isolation. But compared to the Nasdaq Composite’s performance or other benchmarks, the price action is definitely lacking.
A buy and hold strategy during this period has also woefully under-performed trading shares more aggressively. Buying during QCOM stock’s smaller bearish cycles and shorting during bullish-looking phases as detailed in the weekly chart below has made a lot more sense (and dollars) for investors.
But I’m thinking QCOM stock is due for a change of character and conditions are going to get seriously more bullish going forward. The spark to lift Qualcomm higher could be the company’s proclaimed “first-mover” advantage in the 5G networking space.
As a technical-oriented trader, I’m simply appreciative of Qualcomm’s price chart and today’s bulls having the first-mover advantage. With this semiconductor stock just narrowly confirming a bullish candlestick reversal pattern near trend support after smaller bearish phases, it’s time to buy QCOM stock now and set a manageable stop-loss slightly below the pivot low.
The bottom line on QCOM? Even if Qualcomm stock fails to live up to our expectations, today’s chart is a solid risk-to-reward proposition within a wide up-channel with plenty of room for massive profits.
Short AVGO Stock
The other half of our semiconductor stock pairs trade is a short on Broadcom. Prior to 2018, AVGO stock had enjoyed a strong bullish run of nearly five years. But today’s situation serves to remind me that all good things do come to an end.
Technically, shares of Broadcom have developed into a downtrend in 2018, which has been supported by a series of lower highs and lows on the weekly chart. This price action has coincided with two shorter and steeper support lines failing.
AVGO’s third and primary trend line remains intact following a picture-perfect test. Speaking of perfection, shares of this semiconductor stock also boast a classic 30% correction from 2017’s all-time-high.
Personally, perfection is for accounting and not trading price charts as those sort of occurrences make for great traps. As such, I suspect a fan-like bearish failure is nearby and a continuation of Broadcom’s downtrend will continue.
Additionally, and also an early indication a more durable bear market is close at hand, is a symmetrical triangle developing on the weekly chart. The formation is almost complete and it works as a strong continuation pattern. With shares currently trading inside of the prior week’s doji candlestick and stochastics hinting of a bearish outcome, it’s time to put AVGO stock on the radar for shorting.
My advice for this semiconductor stock would be to wait for a move through last week’s close of $129.90 and the triangle’s apex before shorting AVGO. Alternatively, if bearish traders want a bit more price confirmation, a breach of the doji low of $222.58 and pattern support makes sense. Either way, a stop above the doji high and triangle resistance is also easy enough to appreciate, and it will keep potential bad outcomes from getting out of control.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional options-based strategies, related musings or to ask a question, you can find and follow Chris on Twitter @Options_CAT and StockTwits.
