In early January, Qualcomm (NASDAQ:QCOM) stock had a bullish setup, but it failed miserably. Instead of triggering a bullish pattern off $58 per share, on Jan. 15, it tumbled 15% to a lower low than the Christmas crash and last April correction.
February has been a different story for the stock. QCOM has recovered the December lows and is on its way to erasing the January correction altogether. A sure sign of strength is when a stock rallies in the face of adversity.
Yesterday, the stock market was in a tizzy, yet Qualcomm stock rallied 1.60%. There were a few pockets of strength on a red market day and this one was one of them. This relative outperformance is proof that there are eager buyers of the stock.
So, if and when the mini-correction is done then QCOM is likely to overshoot higher. If I am long the stock, then I stay in it. Those who want to own it for the long-term need not sweat the short-term whipsaws.
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The most recent dip found footing at a long-term support zone created when the February 2016 rally started. In the past two years, there were a few pokes below $49 per share, but if you blinked you missed them. QCOM stock didn’t close there on the weekly candles.
But for those who prefer surgical trade levels then there are short-term lines to watch.
From that perspective, this is not an obvious entry point, because it has been in a breakout that started around Feb. 19 and off the $52.25 per share level. I charted the target in an ascending zigzag and we are almost there.
Moreover, now it is approaching a major pivot area that was the prior failure level late January. On the way up, when a stock reaches a prior area of contention, it acts as resistance. Both bulls and bears will want to fight it out thereby creating congestion. This is not the same as saying it will fail again, but it could present a temporary stall until the bulls muster enough momentum to retake the level.
Those looking for an entry point into Qualcomm stock should wait for a breach of that resistance. Then, as it breaks above it, QCOM buyers would chase it on a momentum run. This, of course, poses the risk of missing some of it.
There are those who like to jump-the-gun and start early, so not to miss any of the rally. In that case, then I’d have to set stop loss points otherwise I would then end up with long-term investment and not a trade.
On the downside — and considering Wednesday’s large green candle — QCOM now has a weak point from where it could retest $54.10 in the next few hours. That would be a support zone. Losing $53.70 would trigger a bearish move toward $53 per share. This process repeats in a similar way to $51.80 where I expect strong support. This again is not a forecast but the downside scenarios based on the short term charts.
Bottom Line on QCOM Stock
Fundamentally, QCOM sells at a price-earnings ratio of 35, which isn’t exactly cheap.
Compare this to Apple (NASDAQ:AAPL), which is half as cheap from a P/E perspective. Even Facebook (NASDAQ:FB) is 35% cheaper! That said, QCOM stock does pay a hefty 4.5% dividend, so owning it for a while is not likely to be a giant mistake.
Of course, there is always risk and QCOM has elevated odds of headlines since it is still in a nasty patent lawsuit with AAPL and the situation is very fluid. But the company insists that it has its fingers in other areas independent of AAPL which include Autonomous driving and connectivity.
I have learned to not completely trust management’s words, but I am willing to give them some benefit of the doubt. But I insist that the best trades have entry thesis and exit targets on both success and failure scenarios. The upside here is closer to $59 per share but it will see more resistance around $56.75. The upside opportunity is there, however, with what seems like limited downside from here.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
