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Analysis, Perspective, Trading Strategy
Qualcomm Explodes: Anatomy of a Monster Trade
Editor Joe
Duarte in the Money Options
The stock market took a breather during the first real
week of earnings reports, with the banking stocks generally beating expectations
and rallying while tech stocks delivered a mixed bag. The worst hit sector
was healthcare. Indeed, from a technical standpoint, we may be seeing the
early stages of some sort of decline in upside momentum for some sectors
of the market, but not necessarily in the technology area.
On the down side of the earnings parade were the reports from IBM and Netflix,
while the JPM delivered a better than expected report. Meanwhile we had unexpectedly
good news from QCOM, which reports its earnings on May 1. The stock moved
decidedly higher after settling a court battle with Apple, leading the shares
to soar. Happily, we bought QCOM in early March 2019, and the stock has so
far delivered a 40-plus percent profit.
My point is that if this market starts to struggle, and there are some
peripheral signs that it may do so, stock picking and asset allocation will
be the most useful tools for traders. As a result, I want to review the Qualcomm
trade in some detail.
Shares of QCOM, a leading telephone chipmaker, bottomed out in January
2019 after being routed in the late 2018 bear raid. Most interestingly, On
Balance Volume (OBV) started rising along with the shares, even though volume
was fairly tame early in the year. This was a sign that even though trading
was light, the money that was coming in was decidedly overwhelming any money
that was leaving. This is a sign that value players are building long term
positions.
An even more bullish sign was that there were no real news items to boost
the stock, yet the money kept coming in. By March, the steady money flow
was not slowing, which suggested that bigger money was moving into the stock
and that there might be something in the works. Meanwhile the stock started
to make bigger gains, a sign that momentum was increasing.
It is well known that computer trading algorithms, because of their proximity
to the exchanges’ computer systems are able to see trades before they come
into the virtual trading floor. As a result, they execute their trades at
a better price and capture the difference as a profit when they sell to the
slow traders like the rest of us. In this case, the robots were alerting
us that something might be up.
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And while the whole algo thing seems fishy, it’s perfectly
legal. Furthermore, here is some good news. Because the algos always know
which way money is flowing on every single stock at any moment, they are
always on the right side of the trade. That means that the general trend
of a stock’s price is usually reliable. By using that knowledge, it was clear
that something was up in the case of QCOM, which allowed us to build a position
in the stock long before it popped.
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This is what we do here every single day; look for opportunities
to make money before the crowd jumps on.
Bullet Train
- Calendar : U.S. GDP is released on Friday, while
Durable Goods and Consumer Sentiment data is also out. Big earnings
week featuring FB, MSFT, AMZN, CAT and others.
- Big Picture : The third year of the Presidential
Cycle (2019) is traditionally bullish for stocks. The U.S. economy
is showing signs of slowing growth but this may be fleeting. There
may be a shift in the political winds heading this way.
- Risk : Watch earnings, and the algo response
to the rising political situation in Washington. Keep
a very close eye on U.S. China trade talks and the ongoing reserve
ratio manipulations in China and how the market responds to good
or bad news on any front.
- Market Behavior : The trend remains up but a
short term pause may be in the works. But don’t blink, because you
may miss it as dip buyers are lurking.
- What to do : Stay patient and don’t chase stocks
at this stage. Expect intraday volatility. Continue to use options
for high priced stocks but remain selective
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3. Weekly
market
analysis
and
portfolio
updates
gives
you
the
big
market
picture.
4. Joe
has designed and
fully tested a select
group of easy to
follow and deploy
option strategies
coupled with on-
point stock and ETF
picks focusing primarily
in the biotech, healthcare,
and technology sectors.
5. In
depth
individual
position
technical
and
fundamental
analysis.
6. Unlimited
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buy
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A-D Line Takes Breather
The New York Stock Exchange Advance-Decline line (NYAD) has uncannily predicted
the general trend of the stock market since the 2016 presidential election,
which is why I feature it in this space weekly. The line has been making
new highs of late, and the market has been in a generally bullish trend.
However, this indicator took a breather last week, and did not make a new
high. Of course, it remains within striking distance of a new high, which
is bullish. However, if as earnings season develops the NYAD starts to show
signs of weakness it could be a signal that the market may be ready to roll
over.
Meanwhile, the S & P 500 (SPX) index is within striking
distance of its all time highs while the Nasdaq 100 (NDX) delivered a new
all time high on 4/17/19. SPX is lagging because of the weakness in the health
care sector (XLV) due to calls for “Medicare for All” by Democrat candidate
Bernie Sanders. But technology (XLK), banking (BKX) and energy (XOI) made
up the difference.
The new high in NDX came on strength from QCOM and INTC,
although the index was not able to extend its lead for two days running,
yet another sign that some sort of pause may be in the works, barring the
breakout of some unexpectedly good news which trips the headline driven algos
to buy stocks. Still, Accumulation Distribution (ADI) and On Balance Volume
(OBV) remains positive, which suggests that trading in tech stocks may now
be more attractive than trading in the broad market.
SPECIAL
Subscription Offer
1. Over Twenty-Seven Years of
Trading Experience
2. Now Joe is
bringing all his years of expertise
to his new options focused web
site with two goals: Risk Management
and Profit Delivery.
3. Weekly
market analysis
and portfolio
updates gives
you the big
market picture.
4. Joe
has designed
and fully tested
a select group
of easy to follow
and deploy option
strategies coupled
with on- point
stock and ETF
picks focusing
primarily in
the biotech,
healthcare, and
technology sectors.
5. In
depth
individual
position
technical
and
fundamental
analysis.
6. Unlimited
intraday
buy
and
sell
alerts
as
called
for
by
market
and
individual
positions.
Subscribe
Now by clicking here
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Stay Patient. Be Selective.
It’s getting harder to find stocks to buy in the broader market,
which could be a sign of a slowing in the market’s rise or even a real
correction. However, it is also possible that money flows into technology
stocks may not suffer as much as other areas in the broad market.
In this type of market there is no need to be in a hurry in the short
term. If prices do pull back, then we can use support levels such as
the 20 and 50-day moving averages, when they hold, as places to re-enter
stocks at lower prices.
Otherwise, we stick with what’s working and see how things develop.
And of course, earnings season is just getting started, which means
that the market’s daily trading pattern will be highly influenced by
both earnings news and individual company guidance.
Joe Duarte has been an active trader and widely recognized stock
market analyst since 1987. He is author of Trading
Options for Dummies, rated a TOP
Options Book for 2018 by Benzinga.com - now in its third edition, The
Everything Investing in your 20s and 30s and six other trading
books.
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