Micron Technology (MU) - Get Report is perfectly positioned to benefit from a long-overdue cyclical upswing in the memory business, as well as a geographical advantage induced by the Japanese earthquake, which has dealt a major blow to its competitors. These synergistic forces have the power to lift this humble stock to price levels not seen since the middle of the last decade.
Memory chips produced amazing profits in the 1990s when the public discovered the Internet and personal computers flew off the store shelves. Each new generation of processing power from
and software power from
put pressure on the memory industry to play catch-up with state-of-the-art RAM chips that could handle the heavy load.
Unfortunately, after the tech bubble burst in 2000, profits turned to pain, with memory prices taking a dive and commoditizing the entire industry. It then became the tech sector's ugly stepchild, underperforming year after year, despite two bull markets. In fact, things got so bad that Micron dropped all the way to a 16-year low at the bottom of the 2008 crash.
New generations of handheld and single-purpose computing devices have finally taken up the slack, with solid-state devices stepping forward to replace the moving parts of low-tech disk drives. These high-margin gizmos will raise Micron's lazy growth curve in the years ahead and make the company far more attractive to an investing public that already loves tech stocks.
Let's look at this stock's history in the long and short term to gain a better perspective on the highly positive price action that I expect to unfold in the second quarter and beyond.
Micron broke above 1988 resistance (blue line) near $2.50 (pre-split) in 1993 and entered a powerful bull market that lifted the stock up to $47 in 1995. It consolidated those massive gains through the second half of the decade, finally breaking out in March 2000 (red line), just one week before the
peaked over 5000 and reversed, ending the tech bubble.
The stock continued to shine into the summer of that year, rising to $97, while the rest of the tech universe was battered by intense selling pressure. It then turned tail and joined its peers, dropping like a rock in a three-legged decline that ended near $6.50 in early 2003. Price doubled in the next year but still lagged the powerful recovery that was taking place in other tech sub-sectors.
It's interesting to note that Micron traded out of synch with the broad averages and tech sector through the 1990s and first half of the last decade. This contrary price action continued into the summer of 2006, when the stock topped more than a year before the major indices. It then shifted into a period of strong index correlation that continues to the present time.
The downtrend that began in 2006 finally ended in November 2008, when the stock bounced off support near $2 that was set into place in the early 1990s. It then entered a powerful uptrend that lifted into a two-year high above $11 in early 2010 and stalled out. That price level roughly aligns with the 62% retracement of the 2006-to-2008 downtrend.
The stock then rolled over and sold off in a steep correction that shaved nearly 50% off its value before bottoming out in the late summer near $6.30. It turned higher at the same time as the major indices and shifted back into rally mode. The good vibes continued into February of this year, when the recovery lifted above the 2010 high (red line) and printed a three-year high.
Micron spent just five days at a new high and then gapped down, signaling a failed breakout that has set the tone for the last six weeks. The subsequent pullback shows two down waves, with the second decline ending just under the 50-day moving average. The stock churned at that level for two weeks and then zoomed higher last Thursday, following a strong earnings report and outlook.
The sideways action between $10 and $10.50 took place right after the Japan earthquake, pointing to a failure to take advantage of competitors' misfortune. However, earnings finally lifted the cloud, triggering a rally back into the February high. In addition, that buying spike has completed the next phase of a multiyear cup-and-handle pattern.
A cup-and-handle breakout will set the stage for a powerful rally that could easily reach mid-decade resistance between $18 and $18.50. That uptrend would also mark a 50% gain from current price levels. However, it's still early in the game, because the handle, which is drawn from price action since Feb. 14, needs to fill out and carve out its own breakout pattern.
This progression suggests another two to four weeks of sideways movement, which makes sense, given the unfilled gap between $10.70 and $11.20. At a minimum, this gap needs to get filled in order to support a strong base for an uptrend. For this reason, you should focus your attention on $10.70, where the gap bottom is coming into alignment with the 50-day moving average.
An orderly selloff into that price level, projected by the green lines, would mark the first buy signal, ahead of a bounce back to the high and a major breakout. I'd avoid chasing the upside, because you could get caught holding the bag when the stock turns lower and heads for the gap. Be patient, wait for the signal, and you could be rewarded with one of the best trades of 2011.
At the time of publication, Farley had no positions in stocks mentioned, although holdings can change at any time.
Alan Farley is a private trader and publisher of
Hard Right Edge
, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of
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. He has written two books:
, due out in April. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.
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