Chip Stock Poised for a Double-Digit Drop in 3-6 Weeks

Serge Berger

In June, memory chip manufacturer Micron Technology (MU) blasted off on another rally despite an already steep ascent off its November 2012 lows. As the stock moved past its 2011 highs, though, upside momentum quickly began to wane, and a couple of weeks after its June 19 earnings report, the stock fell into a three-day slump in early July. After a short-lived reaction rally, MU fell right back to the recent lows, and just broke a support area that could meaningfully accelerate the downward press.


To be sure, MU isn't the only stock in the semiconductor space that has come under pressure in recent weeks. A quick glance at the Market Vectors Semiconductor ETF (SMH) reveals that the entire group has seen some profit-taking in the past two weeks or so. 

The more pertinent question, however, is whether the flash breakout to new highs in mid-July, which lasted a mere four days, was a so-called breakout fake-out that eventually leads to a better correction of at least another 10%. 

Technically, SMH looked like it could continue to push higher -- that is, if one assumed earnings season would come to pass kindly. But several-post earnings smackdowns in the group have brought about volatility, which in some cases was significant.   

SMH Chart
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SMH Chart

Going back to MU, the weekly chart below shows clear swing exhaustion, and during the past three weeks, the stock developed two weekly closes that should get the bears' attention.

As geometry is as much a part of the markets as in architecture, I would be remiss if I didn't point out the similarities between the two major rallies since the stock's late 2008 lows. On a percentage basis, the rally off the late 2008 lows was significantly larger than the rally off the November 2012 lows, which had a notably steeper slope. What the two rallies do have in common is the length of the red lines on the chart, and thus, geometrical symmetry is displayed.

The second item to take into consideration on the long-term chart is the breakout to new highs in July. Given the weak weekly bars of late, MU increasingly looks to at the very least be undertaking a mean-reversion move, which should re-test the previous breakout area around the $11.50 mark. 

MU Stock Chart - Weekly
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MU Stock Chart - Weekly

On the daily chart, MU made a lower high on July 23 versus its July 1 high, and since then, quickly reversed back down to a lateral support area near $12.50, which the stock bounced off of in mid-July. 

Last week's renewed selling pressure led to the first close below its 50-day simple moving average since December 2012, and thus a clear trend break. And today's close below $12.50 was the final piece of the puzzle that traders needed to short the stock.

Given this newly accelerated downside pressure, the first stop for the stock could be closer to the 100-day moving average, which currently sits around the $11.25 mark, and only $0.25 below the lateral support area at $11.50 discussed on the weekly chart above.

Traders looking to play potential further downside in the stock now have naturally defined support and resistance areas to focus on.

MU Stock Chart - Daily
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MU Stock Chart - Daily

Recommended Trade Setup:

-- Sell MU short at the market price
-- Set stop-loss at $13
-- Set price target at $11.50-$11.25 for a potential 8%-10% gain in 3-6 weeks

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