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Intel (NASDAQ: INTC) made major headlines last week when the company announced it is raising second-quarter and fiscal-year sales and gross margin guidance. The surprising news sent shares of INTC surging 7% on Friday, and it had a ripple effect across the so-called "old tech" sector, including Microsoft (NASDAQ: MSFT) and Hewlett-Packard (NYSE: HPQ).
Friday's momentum put the wind at the bulls' backs for the medium term. After peaking in August 2000 and then violently mean-reverting lower, INTC spent the past 13 years treading water. Demand for its chips waned over the years as the PC and laptop market became more saturated and we witnessed a shift toward mobile computing solutions like smartphones and tablets.
Yet PCs and laptops remain a large part of both the corporate and home computing landscape, and eventually these machines need to be upgraded, creating demand for chips from Intel, software from Microsoft, and hardware from the likes of Hewlett-Packard.
I have seen countless situations where market participants expect a new technology to quickly make any existing technology in the space obsolete. This leads to an overvaluation of the new technology stocks and overselling of the old technology stocks.
More often than not, the old technologies don't disappear overnight and continue to be in demand for some time. Furthermore, if the old tech stocks had considerable market share, they tend to be large, allowing them to invest in new technologies either directly or indirectly.
In other words, PC industry giants like Intel, Microsoft and Hewlett-Packard have the means of making forays into new technologies in order to adapt to the changes in the personal computing landscape. Intel, for example, makes chips for tablets, while Microsoft makes tablet hardware and software and has made significant acquisitions in new technologies over the years.
Turning to the charts, we also see a very bullish similarity between MSFT and INTC.
Earlier this year, MSFT broke out of a long-term basing pattern. After capitulating into the depth of the financial crisis, it formed a constructive consolidation pattern. This long-term breakout should continue to support MSFT shares for years to come.
With Intel's rally on Friday, it joined Microsoft in a massive -- and I mean massive -- long-term breakout, as the stock closed the week at a fresh 10-year high.
When a stock is supported by another that its sales are closely tied to, this can greatly enhance the probability of a bullish trade setup. In this case, the long-term chart breakouts of MSFT and INTC are a good tell that the stock's uptrends should continue in coming years (however, this doesn't mean 15%-20% corrections won't take place along the way).
Intel's next earnings announcement is scheduled for July 15, when we will see whether the company's revised outlook is at least partially confirmed. While Friday's high-volume breakout move has significantly bullish underpinnings from a medium-to-longer-term perspective, the stock may be getting extended in the near term.
As such, I am looking to buy INTC for a longer-term move once it has retraced much of Friday's pop by pulling back below$28.50.
Recommended Trade Setup:
-- Buy INTC below $28.50
-- Set stop-loss at $26
-- Set initial price target at $34 for a potential 19% gain in 2-6 months
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