Semiconductor stocks have been in turmoil, tumbling in last week's selloff, but coming back strong to start this week, Jim Cramer told his Mad Money viewers Tuesday.
To figure out where they're going next, Cramer went off the charts with Carolyn Boroden, who runs the FinnacciQueen.com web site and is a contributor to RealMoney.com.
Cramer and Boroden looked at shares of three companies: Nvidia Corp. (NVDA - Get Report) , which makes chips for graphics, artificial intelligence and autonomous cars; Micron Technology Inc. (MU - Get Report) , which makes DRAMs and flash memory; and Applied Materials Inc. (AMAT - Get Report) , which makes the equipment other companies use to make chips.
Nvidia's stock is among the best performers in the S&P 500 for the second year in a row. The daily chart shows why buying softness in the shares has paid off repeatedly. The stock pulled back from $172 last Monday to $155 by Friday. But if you didn't buy quickly, you missed the chance, as shares rebounded to $167 Monday. Even with the run up in shares, Boroden thinks that the stock is still deserving of attention. And the stock occasionally offers a pullback like last week.
To prepare for the next opportunity, Cramer and Boroden looked at what happened with the last one. First, Boroden noted that when shares were hit last week, the decline was very similar in scale to prior pullbacks. In addition, Boroden liked the fact that Nvidia had two powerful floors of support.
Boroden found two clusters of Fibonacci levels, from $151 to $152 and another from $144 to $148. At its lows last Friday, Nvidia fell to just under $153, just touching the first floor of support before it bounced hard.
As long as the stock holds above these zones, Boroden remains confident about Nvidia's longer-term trajectory. Members of Cramer's Action Alerts PLUS investment club were alerted to buy the stock on the dip last week. August and September often see short, sharp pullbacks, according to Cramer, so the $152 level remains key to another buying opportunity.
As for where Nvidia is headed? Based on her same Fibonacci methodology, Boroden thinks the stock could trade up to $176 to $180 before it runs into real resistance. Beyond that hurdle, there's another one at $187 to $188. After that, Boroden sees one more ceiling at $209, which is her extreme upside target.
Boroden's spotted another pattern with Nvidia. She's noticed a low-to-low timing cycle. It typically takes Nvidia about 28 to 32 days to go from one low to the next. For example, last Thursday's near-term bottom in the stock came 28 trading days from the last low. If that pattern holds, then the next big pullback in Nvidia could come in mid to late September. So, if you already own it, Boroden thinks you could have smooth sailing until next month, and if you don't own it, then maybe think about waiting for the next selloff before you pull the trigger.
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Micron, a classic commodity chipmaker, actually peaked in June. Since then it's been drifting lower -- until yesterday when it bounced back with alacrity. Based on her Fibonacci ratios, Boroden thinks that Micron has a floor of support running from $25 to $26 and change, which is one reason why the stock keeps finding traction at the $27 level.
Now that Micron's bouncing, though, back up to $29 today, Boroden wouldn't be surprised if it can start making new highs. She could see Micron traveling to $34 and then perhaps to $36 after that. However, if the stock breaks below its floor of support in the mid-20s, then Boroden says this whole setup is a bust and you need to capitulate.
Micron's a boom-and-bust business. It's been booming in recent years because everyone in the DRAM and flash industries has been disciplined about not adding too much new capacity, but that situation can't last forever. When Micron and its competitors start really boosting production, pricing will eventually fall apart and earnings estimates will get slashed. Of course that hasn't stopped the stock from rallying hard over the past 18 months. But it's important to remember that the run in Micron has a limited shelf life.
Just like Micron and Nvidia, Applied Materials tested its floor of support last week, at the $41 to $42 level. It's now bounced up to $43 and change. Boroden says that if AMAT's stock can hold above the floor in the low 40s, she wouldn't be surprised if it can rally hard. She thinks Applied Materials could trade all the way up to $49 before it encounters major resistance, and if it clears that hurdle it could hit $51 or even $52. Just like the others, though, if Applied Materials breaks down below $41, or its second floor of support down at $40 and change, then Boroden recommends throwing in the towel.
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