Shares of chip maker Qualcomm (NASDAQ:QCOM) have soared in parabolic fashion after a settlement earlier this month with Apple (NASDAQ:AAPL). The settlement led to a six-year chip-supply agreement. While the getting has been good for QCOM stock bulls over the past few days, the stock is now reaching severe, near-term overbought territory. Active investors and traders could look to play the stock from the short side for a trade.
A former mentor of mine used to remind me daily that some of the best opportunities in markets arise after an asset makes a quick multi-day/week parabolic move to the upside or to the downside. Why? Because the crowd has a habit of chasing steep charts, which inevitably leads them to buy the highs or sell the lows. By taking the opposite of those emotions, traders can often capitalize quick and high probability gains.
QCOM Stock Charts
The recent settlement that Qualcomm reached with Apple is undoubtedly a positive for Qualcomm stock as this previous uncertainty has kept many investors away from the stock and it also brings back royalty payments from Apple to Qualcomm.
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
Moving on to the charts we see that as recently as early February, QCOM stock was trading at the very low end of its long-term up-trending range. The 50% rally over the past week or so has now pushed the stock to levels not seen since 2000.
While this “breakout” nature of the rally would not necessarily be a reason to position for a near-term bearish trade, what is concerning is the parabolic nature of the rally.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart we see that as a result of the steep multi-day move in QCOM stock, its daily MACD momentum oscillator is now at record all-time overbought readings. While I am not advocating a major collapse in the stock from here (far from it, I actually am bullish the stock on pullbacks), it would not take much from here for the stock to set in a pause and mean-revert lower back toward the $80 level.
Thus, active investors and traders could look to short QCOM stock or buy at the money puts or put spreads for a trade. Upon a mean-reversion period, any strong bullish reversal would be a stop loss signal.
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