Friday, December 30, 2016

QCOM Trading in 5-Point Channel Following Acquisition News

Following reports on 29 September that Qualcomm, Inc. (NASDAQ: QCOM) was in talks to acquire NXP Semiconductors, N.V. (NASDAQ: NXPI), shares of QCOM leapt 5 1/2 points in the day's trading session.  From that date through the present, a five-point channel with a very slight upward slope formed, holding price within that near-horizontal range for three months.

The acquisition itself was formally announced a month later on 27 October, with Qualcomm's official press release.  They paid about $47 billion, purchasing all outstanding shares for $110 per share.  The deal is expected to return $30 billion in revenue annually for the combined company.  The stock did jump another three points on that news, although by the following day it had retreated nicely back into the channel that has been holding it steady all quarter.

QCOM Daily Chart
As of today, the stock is resting once again at the bottom of the channel.  It's also sitting on top of a diagonal support line that goes all the way back to 7 March 2016, so that line may have a bit of strength to it.  The bearish engulfing candle that formed today is somewhat troubling, but candle patterns alone mean nothing without confirmation.  A strong day on Tuesday - remember, the market is closed, Monday - will negate the bearish engulfing pattern and will be a nice setup for a long trade.

Today's candle dipped below the lower Bollinger Band channel but rallied briefly to close back inside the bands.  I've found that to be a somewhat reliable indicator, although I prefer the candle to have a long shadow and short body (if it's dipping below the lower band).  This signal is much weaker given the length of body compared to the full range.  As a result, we do need to see what strength (or weakness) develops on Tuesday before we can safely say this is a good long setup.

The RSI(9) oscillator does caution us against taking too bullish a view, however.  It confirms the general weakness of the channel pattern, and it signaled a bearish divergence on the 27 October high. Even the channel engulfing the RSI signals bearish divergence since it's falling while the price channel is rising.

So we currently have these three data points:
    1. Price is resting at both the bottom of a 3-month long channel and right on top of a 9-month long support line.  
    2. Today's candle formed a bearish engulfing pattern.
    3. The RSI(9) Oscillator formed a lengthy bearish divergence pattern.
 Let's turn to the weekly chart to see if it can offer any assistance in deciphering the next move.

QCOM Weekly Chart

Here the overall picture does clear up a bit.  Notice first the fully developed 5-wave impulse that completed on 26 September.  What we don't know, of course, is if that's the end of the pattern or if that's merely the completion of Wave-1 at a higher level.  That the initial impulse ended, though, does eliminate that type of upward pressure on price, and it does indicate that we need to exercise caution on the long side.

What manifests as a near-horizontal channel on the daily chart, however, turns out to be a well-defined descending triangle on the weekly chart.  It looks like we're currently trading at about the 50% point from the initial leg to the apex, and a breakout typically occurs about 2/3 of the way through the triangle pattern.

Like the daily chart, the weekly ended right on top of the triangle base.  Furthermore, the weekly candle was extremely bearish, and it immediately follows the gravestone doji that was drawn last week.  Combined, the two create an extremely bearish signal.  Add to that mix, is this week's close which crossed below the 10-week, 20-week, and 200-week moving averages.

Finally, the RSI(9) Oscillator on the weekly chart is also displaying b bearish divergence and showing significant weakness. The RSI continues to drop and still has a long way to go before it reaches a level that could indicate a potential bottom.

So on top of our daily chart data points, let's add these from the weekly chart:
  1. A long red candle with a very short shadow closed the week following a gravestone doji last week.
  2. The weekly close crossed below three critical moving averages.
  3. The RSI(9) Oscillator showed a bearish divergence and continues to show pattern weakness.
When we combine the data from the daily chart with the data from the weekly chart, we must conclude that there's a significant amount of downward pressure at the moment.  A long trade from here will not likely reach the top of the channel.  Instead, the target would be no further than the top of the descending triangle, or in a shorter term, the top of the horizontal resistance line that cuts through the triangle.  So we're looking at a profit target close to $69.  From here, with a stop below the channel line, we still have a decent 3:1 reward to risk ratio, so if we do get a bullish reversal pattern at the beginning of the week, we can take a long setup if we so desire.  Just keep in mind that there's not a lot of demand manifesting at the moment, so be prepared for a quick exit.

The more likely play is to the short side on continued weakness.  The downside move on a break is close to $7, and with a tight stop, the risk will be fairly low.  Be alert for a strong move breaking the channel bottom. Volume will be higher next week than we've seen for the last couple of weeks, so don't be fooled by a return to normal volume, though.  Look at the volume patterns from a few weeks ago for comparison.  We'll take the setup that the daily chart offers us.  Just be sure to factor the overall risk assessment into the position sizing, and be prepared to exit immediately if the signal turns out to be a head-fake.

Happy Trading.

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