Chart of the Day – QCOM: Minding the Gap

by Enis May 15, 2014 1:49 pm • Commentary

Dan had a nice trade in QCOM in April ahead of its earnings report, with the following rationale for a slightly bearish trade:

My View:  With the stock back at levels not seen since 1999, and what appears to be VERY positive sentiment on the stock, evidenced by analysts ratings, low short interest, the relative low levels of implied volatility and the fairly tight spread btwn IV and realized vol, I am inclined to think it would take a massive beat and raise to get the stock to break out in a meaningful way.  But as I said above, the stock trades at a very reasonable valuation relative to EXPECTED growth, 23% of their market cap in cash, no debt, they pay a dividend that yields a little over 2%, and are extremely well managed.  There is a lot to like.

All that being said there is a lot of good news priced in a current levels, and I want to make a defined risk (slightly) bearish play that the stock pulls back to recent support following tonight’s report.

He took it off for a double the following day as QCOM went right to the 77 strike of the put calendar.

In any case, we’ve been watching the stock’s price action ever since that weak earnings reaction. Yesterday, the stock filled in the earnings gap at $80.71, only to sell off into the close.  The stock is selling off more aggressively today, and is back below $80:

QCOM daily chart, Courtesy of Bloomberg
QCOM daily chart, 50 day ma in pink, 100 day ma in green, 200 day ma in yellow, Courtesy of Bloomberg

The 50, 100, and 200 day moving averages are all still comfortably upward sloping, so QCOM has shown much better relative strength compared to most tech stocks over the past couple of months.  Even the decline on earnings closed right at the 50 day ma, and the stock hasn’t touched its 100 or 200 day ma’s since July.

Nonetheless, the gap fill and fail action in the stock over the last 2 days does not look constructive from my vantage point.  We missed the bearish entry yesterday, but have our eye on it.  My hunch is that if QCOM breaks the $76.77 earnings intraday low in the coming weeks, it likely has a date with the rising 200 day moving average, currently around $72.75.