Technicals Signal This Semi Stock is About to Take Off
In April, the technology sector looked like it was about to break down in a big way. However, it turned out to be a false alarm that merely let bulls buy at better prices.
Within the sector, there was also something bullish going on just below the surface: Semiconductor stocks, which were the tech standard in the 1990s, were finally participating… and in a good way.
Some semi stocks soared in May after releasing earnings, and that should have been a tip off that things were improving for most of the group. After all, if there is enough business for some companies to thrive, chances are there is enough to go around, even in a sector that is as diverse as this one.
So now I’m on the lookout for laggards in the sector that are on the move, and the one I like is Maxim Integrated Products (NASDAQ: MXIM), a manufacturer of linear and mixed-signal integrated circuits.
Although the stock now trades in the middle of its 52-week range and is still only a shadow of its pre-2000 tech bubble self, the long-term trend is unmistakably to the upside.
There are many positives on the chart. For starters, recent declines held firm at the 200-day moving average while the current month-old rally looks like a lift-off from the now rising 50-day moving average. In other words, the intermediate- and short-term trends are also to the upside.
On-balance volume, which keeps a running tab of volume traded on up days minus volume on down days, is rising and at quite a nice clip. I use this indicator as a proxy for supply and demand, as well as money flowing into the stock. When it is rising as it is now, we can surmise that bulls are more aggressive than bears, which means demand is strong.
Considering that prices have been moving sideways for about three months we can infer that this range is merely a pause in an ongoing bullish trend. The odds now favor an upside resolution, and we could even argue that a breakout has already occurred.
The resistance line drawn on the chart runs through daily closes so we can ignore the intraday highs seen in April. That means there is no real resistance until the October highs near $42, which is more than 10% above recent trading.
The rest of the analysis is also fairly simple and focuses on the four pillars of charting.
Price, of course, is the most important pillar because that is how we measure success. So far, we’ve see price action with a rising trend and a bullish-leaning resting pattern. Moving average analysis, which is also price-based, agrees.
The other three pillars — volume, sentiment and time — are the supporting players. They can enhance or, if strong enough, overrule price’s forecast. In the case of MXIM, volume agrees with price.
Sentiment is a bit trickier to assess with this stock. Maxim released strong fiscal second-quarter results in January, right after the stock plunged more than 20% in just over three weeks’ time. Investors piled into shares after the report and the stock abruptly stopped falling.
We expect stocks to do well after positive earnings news, but MXIM seemed to stop the bears dead in their tracks. That is to say, investors’ mood surrounding the stock quickly changed.
Finally, the time parameter comes into play not as a cycle or seasonal tendency, but as a measure of appropriateness. Here we must ask if the current sideways pattern is big enough to consolidate the move that preceded it, and the answer is yes.
Additionally, was the rally similar in size to the ups and downs that have been typical for this stock? Again, the answer is yes.
All told, Maxim is in a good sector, shows positive technical indicators and has already proven itself this year. I’d say this one has the makings of a trend follower’s delight.
Recommended Trade Setup:
— Buy MXIM at the market price
— Set stop-loss at $36.25
— Set initial price target at $42 for a potential 11% gain in four weeks
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