A double in the work

This is year is a year of semiconductors as the whole sector has been on fire continuously, thanks to the fast advancing in the life-changing technologies such as mobile computing, auto-driving, and artificial intelligence etc. All of them will need chips. Micron (MU) is one of those high-flying chip stocks and has almost doubled this year. It is making a new high as I’m writing following another strong earnings report and forward guidance. Some analyst has upgraded it with a price target double from the current level around $38. I agree that MU will double in the next year or so but jumping in immediately may not be a great idea and here is why.

 

You see, as with all the tech stocks during the dot.com bubble, MU had a moonshot run to almost touch $100 back in 2000. Following the bubble burst, it crashed down to low single digit in 2008 and started to move up nicely after the financial crisis, reaching $36 in 2014. But it didn’t hold. Rather it got killed again with a 50% decline in early 2016. So with the current price about $38, it is just making a 2 year high, which is impressive. The thing is, the $40ish price is a strong resistance, a 15 year high that it has to break out. While anything is possible, in general, it is quite difficult for a stock to challenge its 15 year long resistance successfully with just one attempt. More often than not, a few attempts will be required to gain sufficient momentum to  break it. I think this is likely the case for MU as well. Its technical setup has also given some hint on this: there is apparent negative divergence with MACD in both of its daily and weekly charts. It often suggests that MU has not gain enough momentum at the moment to push through the overhead resistance right now. I think the more likely scenario will be that MU may lose its momentum for now and then declines towards its breakout level around $32 to test the support. That will be a more favorable price to get in to me. With this plan in mind, I entered a $37/32 bearish call spread, wishing to make some money if it indeed follows the downward path as I expected. If I’m lucky enough, I will use the gain from this short-term shorting to fund my next long position for MU.