It is no secret that stocks are prone to sudden moves in either direction. This could be triggered by economic data, geopolitical events, stock-specific news, or market sentiment.
Trading such volatile stocks are usually considered a high-risk-high-reward venture. Many traders opt to stay out of the trade rather than risk a loss. However, careful analysis of the charts could help you to enter at the right levels, thereby limiting risk to an extent.
With this in mind, we have started a new weekly series on the trending stock of the week —stocks that are featured heavily in the news.
This week’s stock pick is QUALCOMM, Inc. (NASDAQ: QCOM)
Why is QCOM trending?
The chipmaker company is scheduled to report its fourth-quarter fiscal 2020 results after the closing bell tomorrow, Nov 4. Qualcomm had posted non-GAAP earnings per share of $0.86 for the most recent quarter, delivering an earnings surprise of 19.44%.
Even though there are coronavirus-induced headwinds for the stock, the company is anticipated to report an improved YoY revenue and maintain its earnings-beat streak for Q4.
This is mainly due to QCOM’s 5G chip designs for innovative 5G system solutions and the long-term patent license agreement with Huawei. The Apple smartphones are expected to use Qualcomm’s modems in its new iPhones.
Here’s how to trade QCOM right now.
On analysis, there are multiple bullish indications on the daily chart of QCOM.
#1 Unbroken Uptrend: The daily chart shows that the stock’s uptrend is unbroken, as it has been forming higher highs and higher lows for the past several months. This uptrend line has been marked as a pink color line. The stock had taken support near this trendline multiple times before bouncing higher again. These bouncebacks from the trendline are marked as orange color ellipses in the daily chart. Currently, the stock has bounced higher from this trendline support again, indicating the possibility of an upmove soon.
#2 Flag Pattern: Currently, QCOM appears to be in a consolidation phase with a narrowing range after the latest upmove. This is a classic flag pattern and is marked in the chart as blue color lines. QCOM had formed a similar pattern and broken out of it during the start of-August 2020 when the Q3 results were reported. The stock had also broken out of the pattern at the trendline support each time. With a similar set-up happening currently, QCOM appears to be gearing for another strong move.
However, a narrowing range of consolidation means that a strong move could happen in either direction, i.e., upwards, or downwards.
#3 Price Above MAs: The stock is currently above the 50-day as well as 200-day SMA, indicating that the bulls are still in control.
#4 Bullish Stoch: The daily chart shows that the %K line (blue color) of the stochastic has currently crossed above the %D (orange color) line near the oversold territory. The stock had historically surged higher after a similar setup. This is marked as purple color ellipses. This is a possible bullish sign.
#5 Bullish RSI: The daily chart shows that the RSI is moving higher and is currently near 50, indicating possible bullishness.
Recommended Bullish Trade (based on the chart)
Buy Levels: If you want to get in on this trade, the ideal buy level for QCOM is above the breakout level of the flag pattern at around $126.60. This is marked as a green color dotted line in the daily chart.
Important Note: Make sure that you only enter the trade once the daily close is above the recommended price level.
TP: Our target prices are $132 and $140 in the next 3 to 6 months.
SL: To limit risk, place a stop loss at $123.00. Note that the stop loss is on a closing basis.
Our target potential upside is 4% to 11% in the next 3-6 months.
For a risk of $3.60, our first target reward is $5.40 and the second target reward is $13.40. This is a nearly 1:2 and 1:4 risk-reward trade.
In other words, this trade offers 2x to 4x more potential upside than downside.
Risks to Consider: The stock may reverse its overall trend if it breaks down from the flag pattern with high volume. The sell-off of the stock could also be triggered in case of any negative news, poor earnings, overall weakness in the market, or any regulatory changes in the sector.
Recommended Bearish Trade (based on the chart)
In case the stock breaks down from the flag pattern with very high volume, it could point to an upcoming short-term correction. In that case, below are the entry levels, stop loss levels, and target prices.
Sell Level: You can take short positions on QCOM if it breaks down from the flag pattern, and closes below the trendline support of around $118.00. This sell level is marked as a red color dotted line in the chart.
Important Note: Make sure that you only enter the trade once the daily close is below the recommended price level.
TP: Our target prices are $110 and $100 in the next 3-6 months.
SL: To limit risk, place a stop loss at $123.00. Note that this stop loss is on a closing basis.
Our target potential downside is 7% to 15% in the next 3-6 months.
For a risk of $5.00, our target rewards are $8.00 and $18.00. This is a nearly 1:2 and 1:4 risk-reward trade. In other words, this trade offers nearly 2x to 4x rewards compared to the risks.
Risks to Consider: The stock may reverse its overall trend if it breaks upwards with high volume. The breakout of the stock could be triggered in case of any positive news, overall strength in the market, or any regulatory changes in its sector.
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