Buy Broadcom on Apple's Latest Weakness

Apple gapped significantly lower Thursday morning after the company warned that first-quarter sales would be sliced to $84 billion. This gives investors the opportunity to buy the stock on weakness to a 'golden cross' that's forming on its daily chart at $235.57.

Author:: Richard Suttmeier
Publish date:: Jan 3, 2019 2:16 PM EST

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Apple Inc. (AAPL) - Get Report gapped significantly lower at the open on Thursday after the company warned that first-quarter sales would be sliced to $84 billion, down from prior guidance of $89 billion to $93 billion. This gives investors the opportunity to buy semiconductor giant Broadcom Inc. (AVGO) - Get Report on weakness to a "golden cross" that's forming on its daily chart at $235.57.

Broadcom, a key component supplier to the smartphone giant, ended 2018 in bull market territory while the iShares PHLX Semiconductor ETF (SOXX) - Get Report ended the year in bear market territory. The stock is the largest component of the SOXX and offers a wide range of semiconductors for many global applications not related to the components supplied to Apple. If you want to own a semiconductor stock, Broadcom is your best choice.

Broadcom ended 2018 at $254.28, down 1% for the year and in bull market territory 28.8% above its 2018 low of $197.46 set on July 12. The SOXX ended 2018 at $156.91, down 7.6% for the year and in bear market territory 21.1% below its all-time high of $198.84 set on March 13. The SOXX is up 8.4% from its 2018 low of $144.79 set on Dec. 26. Broadcom represents 9.12% of the SOXX, has a cheap P/E ratio of 13.66 and can be bought for its dividend yield of 4.17%.

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The Daily Chart for Broadcom

Courtesy of MetaStock Xenith

The daily chart for Broadcom shows that the stock had quite a volatile ride in 2018, and notice that a "golden cross" is forming. The 50-day and 200-day simple moving averages are converged at $235.50 and $235.57. When the 50-day falls below the 200-day, the "golden cross" is confirmed and would indicate that higher prices will follow. The upside is represented by two horizontal lines that are my monthly and annual risky levels at $248.74 and $260.78, respectively. These levels are for January only and for the entire year.

The Weekly Chart for Broadcom

Courtesy of MetaStock Xenith

The weekly chart for Broadcom is neutral with its five-week modified moving average at $240.10. The stock is well above the 200-week simple moving average or "reversion to the mean" at $193.75. The 12x3x3 weekly slow stochastic reading is projected to end this week at 68.45 vs. 68.39 on Dec. 28. A weekly close above $240.10 Friday will result in a positive weekly chart. Otherwise, the weekly chart could become negative.

The chart shows a downtrend going back to the Dec. 2017 high and an uptrend going back to the 2018 low. The downtrend was tested in each of the past three weeks and it's at $257.71 this week. The uptrend is at $214.26 this week. This pattern is called a pennant and a trend higher requires a weekly close above the downtrend and vice versa.

Given these charts and analysis, my trading strategy is to buy weakness to the 200-day simple moving average of $235.57 and to reduce holdings on strength to my monthly and annual risky levels at $248.74 and $260.78, respectively.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.