Dead money! That's how you have to refer to any money you may have invested in
prior to its earnings debacle.
I feel compelled to come back to this name because it was a huge disappointment and because I've
and traded it numerous times over the past three months. Fortunately, I wasn't in QCOM when it reported earnings, although it wasn't the result of some grand foresight. It was due to a change in the general market direction over the past three weeks as well as the behavior of the stock itself.
There is a lesson to be learned in every trade and the reason for revisiting QCOM is to illustrate how this debacle could have been sidestepped and to discuss what a trader should do with the stock that is now officially dead money.
When the tenor of the market changed about three weeks ago, many traders rounded up their wagons and became more defensive. I was no different. I cut long holdings -- selling any and all positions that appeared marginal -- and raised cash levels while simultaneously initiating purchases of inverse exchange-traded funds to hedge what positions remained. That is what you have to do when a confirmed directional change occurs in the markets (On
I write a weekly series called
in which I have detailed these risk-mitigation strategies and our implementation of them).
In reflection, QCOM did provide signals to take profits and cut losses prior to the earnings report. In the last article I posted, I spoke of the likelihood that QCOM would break higher a month ago and that the measure of the break would be confirmed if volume expanded. It didn't as shown below.
When prices did break higher and volume didn't expand to confirm the break that was a warning sign. When you get a warning sign, you have to be careful. The next sign was when the general market and the big-cap technology stocks began to sell off - Qualcomm being one of them. Those two warnings signs should have made any holder of QCOM go back to the charts and try to piece together an alternate view. If you had done so, you would have seen the AB=CD pattern that had completed. That was a clear indication to exit. That would have saved an enormous amount of grief and lost coin.
The issue now for holders of QCOM is what to do after this painful decline. The first technical rule on a violent decline such as this is to use the first push back to the gap down area as an exit point. The reason for this is that the supply line now is huge. Consider the fact that you now have everyone who bought this stock since April 2009 in a losing position. That is a tremendous amount of stock.
In the daily, you can see the two probable areas where significant selling will likely materialize.
The real issue is how low it can go if you hold on. Here's the monthly chart.
The problem is the volume expansion on the monthly chart as the break out swing point is tested. With volume expanding into that breakout area, the odds of a further decline on this time frame increases. Volume in February will run heavy as well which is another sign of deterioration on this chart. That leads one to search for support at lower prices and that support lies between $32 and $35.
I would expect QCOM to trade into that target zone before this decline is done.
It is never easy to suffer a decline, and believe me I've been through more than a few. Over time, one tends to get better in his technical reads and tends to reduce exposure when warnings signs appear. You can't sidestep every major decline in every stock but you can reduce the numbers by carefully analyzing the information that the market releases on a regular basis.
If you are one of those who did get stuck in QCOM, your best bet is to at least lighten up on the first opportunity. You will almost certainly get the chance to buy it back at the same or at a better price down the road if you choose.
There is an opportunity cost associated with leaving your money as dead money for an extended period of time. When trying to decide if you should sell or hold a position, then ask yourself the following question, "Would I buy/sell short this position currently?" If you can't answer in the affirmative, then you know it is time to move on.
Until next time, keep trading the charts!
At the time of publication, Little had no positions in the stock mentioned, though positions can change at any time.
L.A. Little, author, professional trader and money manager, writes daily on
, a free educational site for traders and investors. He has been featured in numerous publications and is the author of
His background includes degrees in philosophy, computer science, computer information systems and telecommunications. With a trading philosophy centered on capital protection first and the accumulation of consistent gains over time, L.A. espouses a simplistic technical approach to trading the markets that is a throwback to the days of past. With a focus on swing points and the qualification of trends, L.A. provides a breath of fresh air to an otherwise crowded room of derivative indicators with the emphasis on technical minutiae.