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On Jan. 8, memory chip manufacturer Micron Technology (NASDAQ: MU) reported better-than-expected fiscal first-quarter 2014 earnings. As a result, the stock rallied to fresh multiyear highs, and this newfound upside momentum now looks to offer traders a quick profit.
The company reported earnings per share minus items of $0.77, handsomely beating Street estimates of $0.43. It also beat on the top line with a 120% year-over-year revenue increase to $4.04 billion versus estimates of $3.72 billion.
One of the headline items that seemed to surprise investors was the 69% increase in revenue from DRAM memory chips from the previous quarter. And gross margins widened to 32% from 25% in the prior quarter. This was helped by rising DRAM prices, a trend analysts believe will continue.
To top it off, management reiterated a solid outlook and said it anticipated a "healthy market condition" for 2014.
On the back of the earnings report, several analysts had positive things to say about MU. Stifel Nicolaus, for example, maintained its "buy" rating on the stock and raised its price target from $26 to $31, which is more than 30% higher than recent prices.
Although MU rallied more than 240% in 2013, the post-earnings pop of 10% on Jan. 8 shows that the stock remains in a strong uptrend. This breakaway gap is the trigger for my long-side trade in MU.
The tech stock's heyday of the late 1990s and early 2000s is well behind us, and thus somewhat less relevant, but there are nonetheless some reference levels that traders can focus around.
Most importantly, the stock broke past two crucial longer-term resistance lines (blue parallel lines) last year. As a result of the massive 2013 rally, MU has now retraced 25% of the entire sell-off from its 2000 peak.
Barring any nasty surprises from the company in the near future, this now opens up an upside target near the $38 area with a time frame of about 12 to 18 months. The $38 area is where the 38.2% Fibonacci retracement lies.
With the big picture looking bullish for the stock, the near-term trade-setup that I am seeing is well supported.
On the daily chart, investors' dearest ally since late 2012 has been its 50-day simple moving average. The moving average once again firmly held as support last week, thus offering a good support level for traders to focus around.
After the strong November rally, MU became somewhat overbought as it reached the upper end of its trading range. The stock consolidated throughout December and formed a bullish flag pattern. MU then approached its 50-day moving average on oversold momentum, reaching a confluence support area.
Last week's earnings announcement triggered a major breakout. From here, MU looks to have enough momentum to move toward the $26 mark in coming weeks.
Recommended Trade Setup:
-- Buy MU at $24 or above
-- Set stop-loss at $23
-- Set initial price target at $26 for a potential 8% gain in 3-6 weeks
The tech giant can't seem to do much right in investors' eyes lately, but the charts tell a different story.
A spike in investor fear and confirmed breakdown in the Dow do not bode well for the market in the near term.
Today we have yet another opportunity to generate hundreds of dollars on the stocks in our portfolio.