Trade Recommendation: Micron Technology

Technical Overview

  • Micron Technology has experienced a 6.5-fold increase since May 2016. During this 2-year period, the stock found support at its intermediate-term trendline on numerous occasions (green trendline and arrows in Figure 1).
  • From the last retest of the intermediate-term support (last green arrow), the stock moved sharply higher, carried by a steeper support (violet trendline). The same trendline served as a resistance for two weeks in March 2018, when it was retested from below (last two violet arrows).
  • Today (April 23), the stock is breaking below its short-term support (orange trendline), after failing to remain above its 50 SMA on Friday (not shown).

Figure 1. MU Daily Chart

Implications

  • By the time its correction is over, the stock is expected to have retested the intermediate-term support (green trendline). If the decline is severe and swift, the stock may bounce off the $40 level (i.e. target is the higher of $40 and the green trendline).
  • The stock’s 2018 Resistance (the trendline connecting the March 21 and April 18 highs) is expected to serve as a resistance (red trendline).

Outlook

  • Bearish as long as the stock is trading below its 2018 Resistance.
  • Neutral if the stock moves above the 2018 Resistance.

Trade Recommendation

  • Short at current levels ($48.75 – $49.25)
  • Target: Higher of $40 and green trendline
  • Stop: A close above the red trendline (currently at approximately $53.35, falling by roughly 40 cents/day).

 Benefits of Recommended Trade

  • A favourable risk-reward profile (roughly 1 : 2.25).
  • A sloping-down resistance used as a stop, resulting in an improving risk-reward profile of the trade as time goes by. The steep negative slope of the 2018 Resistance may potentially lead to a situation where the trade is “unsuccessful” (i.e. the stop is hit first before the target), however, still profitable. This is so as the 2018 Resistance will already be below current prices by mid-May (i.e. may get stopped out at a lower price than when the short was initiated).

Disclosure: No position

Featured image courtesy of Shutterstock.

Author:
http://www.linkedin.com/in/konstantindimov