When it comes to trading “trendy” stocks, or at the very least ones that find themselves caught up in headlines with regularity, I have one simple rule:
Avoid them like the plague.
Technical analysis, by virtue, uses price movement to kick out signals on whether to buy (go long) or sell (go short) a particular asset. It does not take into effect legal battles, antitrust cases, or regulatory commissions – all things that happen outside of the charts.
By using points of resistance, support, and other price action-specific tools, we can frame the parameters of a trade. More importantly, we can look for entry and exit points that make sense.
And over time, technical analysis, when used correctly, has worked for plenty of diligent traders with ironclad trading methods.
So that’s why I would usually stay away from trading a company like Qualcomm (NASDAQ: QCOM), which won an important court dispute with Apple in April, and then subsequently lost its FTC trial – an event that may have put QCOM’s future business model at risk.
Investors reacted severely to both cases, causing QCOM shares to boom in April and crash back down in mid-May.
Because of that, QCOM was nearly impossible to trade as a technical analyst. My time-tested tools suddenly became less sharp amidst the courtroom drama and entering ANY positions would have been extremely risky.
But now that things are starting to calm down, Qualcomm’s stock might be worth another look. And it’s all due to a classic “boom and bust” pattern that QCOM currently finds itself in.
Whenever a stock shoots the moon in just a few days (initial spike), it usually chops (sideways chop) for a week or two near the top, before finally dropping (capitulation) to around 50% of the initial spike.
That’s exactly what happened with QCOM over the last month and a half, and now that it’s finding its legs again, there’s an opportunity to go either long or short in the coming days.
In this case, we would want to take QCOM long if it exceeds the high of May 24th (tall red candlestick) by 0.50% ($69.50), as that’s the highest daily high of the recent series of deliberately traded candlesticks. We’re excluding the thin green candlestick from May 22nd, because it came after a significant gap downwards.
Similarly, we would want to short QCOM if it drops 0.50% below the low of May 29th ($64.43), as that level of support is the lowest low of the recent candlestick formation.
Breakout at either resistance or support in this case could lead to a huge move as investors finally get confirmation of which way QCOM is truly headed post-FTC trial.
Plenty of traders will likely pass on this one due to Qualcomm’s media presence over the last few weeks, but now that the “dust has settled”, two big-time setups have revealed themselves, complete with abundantly clear trade triggers.
Entering either one these trades might be too much for some investors to stomach, but those who are bold enough to take a chance on QCOM (in either direction) could reap some serious rewards in the process.
