Chipmaker waves the flag
11/07/18

●Intel (INTC) consolidates after a strong post-earnings rally

●“Surprise” earnings beat included bullish outlook


 

What’s that fluttering on the horizon?

For the past five days, chipmaker Intel (INTC) has taken a bit of a holiday. Since hitting a nearly nine-month low on October 24—the latest swing low in its descent from June’s multi-year high—INTC quickly bounced to a 19-day high before forming an almost picture-perfect “flag” consolidation pattern (or “pennant,” if you want to go with the triangular aspect):

Intel (INTC), 7/30/17 – 11/6/18. Intel (INTC) price chart. “Flag” consolidation

Source: OptionsHouse

It doesn’t really matter what you call it. It’s what the price action implies. The consolidation part is easy. Because consolidations represent shrinking volatility, and because volatility tends to cycle between high and low levels (action and inaction), many traders expect that a market that trades nowhere for a while, especially when it packs itself into a very narrow range, is gearing itself up to go somewhere.

That’s a fine principle, but it does leave traders to figure out when a market may make its move, what direction it may go, and how long the move may last.

Getting back to the INTC chart, what we have is a stock that has been trending lower for several months, but has formed a consolidation pattern—a pause in the action—after bouncing nearly 15% off a longer-term low. Okay, if  someone’s expecting the stock to break out of the consolidation, which direction do they lean?

That’s where the chip meets the motherboard, so to speak. One perspective is to be neutral and trade the breakout no matter the direction. That can work, provided the move has enough follow-through—i.e., it isn’t a brief head-fake that quickly reverses. Most traders, though, will attempt to figure out the market’s likely path, which means incorporating some additional inputs, including information beyond the price chart.

First, Intel’s recent weakness wasn’t unique to the company, as chipmakers moved sideways for much of the year before getting hit hard in last month’s tech purge. The Semiconductor Index (SOX) took a nearly 17% hit between October 2 and October 29 before rebounding.

Long gone are the days when the semiconductor industry was a two- or three-player game and Intel held almost all the cards, but the company hasn’t exactly been consigned to the dustbin of history. Although it’s downturn seemed to prompt observations about the company losing market share,1  its “surprise” earnings beat on October 25 was—surprise— followed a fair amount of favorable press and higher price targets, including one bit of analysis that argued the risk from competition was exaggerated.2 (Funny how news can sometimes seem to follow price trends, and not the other way around.)

Current analyst price targets range from $40 to $68, with the TipRanks average on the E*TRADE website coming in around $55:

Intel (INTC): Analyst price targets, 11/6/18. $54.74 average

Source: TipRanks

Some bulls may look at the earnings surprise, strong up move, and renewed Street positivity and see the potential for INTC to fulfill one of the tenets of consolidation breakouts: Favor price to exit the consolidation in the same direction it entered it, and resume the previous trend (in this case, up).

But the experienced ones always limit risk and keep an eye open for the head-fake.

Market Mover Update: Yesterday afternoon, the market appeared to be following the election day rally pattern described in “The market casts its vote.”

New York Times (NYT) shares pulled back sharply yesterday in the wake of last Thursday’s earnings crush and multi-year high (see “All the stock that’s fit to trade”).

Today’s numbers: EIA Petroleum Status Report (10:30 a.m.), Consumer Credit (3 p.m.).

Today’s highlighted earnings: Michael Kors (KORS), Rockwell Automation (ROK), SodaStream (SODA), Weibo (WB), Microchip (MCHP), Qualcomm (QCOM), Roku (ROKU), Square (SQ), Take-Two (TTWO).


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1 U.S. News & World Report. Intel Is Losing Its Market Share. 8/6/18.

2 StreetInsider.com. Forecasting the race for the House. 10/26/18.