In January, as the equity markets were setting new records, Qualcomm (NASDAQ:QCOM) stock was tracing out bullish patterns that would have set new highs. Instead, the sentiment on Wall Street went from extreme confidence to outright panic in a heartbeat. Stocks collapsed into the fastest correction from all-time highs on record. Qualcomm stock also fell more than 20% from its mid-January highs.
The fears over the coronavirus from China spread rapidly and caused investors to sell all equities. Yesterday was the first strong upside day in a while, but stocks are not out of the woods yet. The CBOE Volatility Index (VIX) is still too high.
If this bounce fails then we could still trigger bearish signals to retest the 2019 lows. The concept seems crazy right now, but it only takes a few badly placed headlines for the selling to resume. While this is not my thesis, I do worry that current events fuel the panic of people all over the world. I am hopeful that we learn that Covid-19 is much less lethal than its current 2% fatality rate.
Meanwhile, there still are opportunities among great stocks that suffered big short-term losses of market capitalization. Qualcomm is one example, but the bulls are still in charge. It is still setting weekly trends of higher lows, so in essence investors are buying dips. I know it didn’t feel like it last week, but as long as critical support levels hold there’s no reason to fret.
The Qualcomm Chart Did Not Lie
While the stock had upside promise, in my late-January note I warned that if QCOM lost $86 per share it would fall another 6% from there. Unfortunately for the bulls, this turned out prophetic as the stock closed at $80.56 on Monday. The point is that the best laid plans must consider both good and bad scenarios. This is the only way to successfully manage risk.
Before putting any money in danger, it is important to also define the time frame for it. Investments have long-term goals so the entry points need not be surgical. Dips that are 20% or more usually are logical buying opportunities. Even then, it is best to start small. Conversely, if the goal is to take a shorter-term approach then it’s important to label it a trade to avoid turning it into an investment.
Swing trades need to have triggers and stop losses. Otherwise the trader is simply throwing darts and hoping for the best. In Qualcomm’s case the fundamentals are solid. It just reported earnings and beat on the top and bottom lines. The company grew sales 5% year-over-year.
Moreover, the wave of upgrades into 5G is upon us, and therein lies incremental upside. This is all to say that there aren’t any obvious shortcomings here. At a price-earnings ratio near 22 and a price-sales ratio just under 4, it’s not a bargain. So if the market-wide selloff continues, Qualcomm is not immune from a deeper correction.
Risk and Reward
We can draw the line in the sand from last week at $73 per share. If the bears can break through it in the next two weeks then the stock can lose another $10 from there. Coincidentally, $73 was also the important level from October 2019. Clearly it’s going to continue to play a role.
By the end of Monday, Qualcomm stock was 10% above this dangerous neckline. It is important that its fans don’t let the bears retest $73. If bears take over, it could trace out the handle of a bearish inverse cup-and-handle pattern with ominous intentions. While this is not my forecast, it should be on the radar of all those who want to swing trade QCOM for a bounce.
The upside potential from here is to fill the gap at $87 per share that this fast correction left open above. It won’t be easy, because there will be resistance at $82 and $84 per share. These were ledges on the way down so there are likely to be sellers on the way up.
With headlines still flying as fast as they are, and with as ginger as the psyche is, traders would be wise to book profits often and early. What is green one minute may be red the next. The World Health Organization still has not declared this virus a pandemic. If it does, the news will likely raise another round of selling in the equity markets.
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. Join his live chat room for free here.
