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Qualcomm (NASDAQ: QCOM ) reported earnings last night and investors sold it on the headline. It's not like they delivered a bad report card; QCOM beat both sales and earnings expectations. But the company committed the cardinal sin of earnings reports and guided lower because of weakness in their China business.
These days Wall Street is so obsessed with the forecast that management reports for future quarters that it's almost like they don't care about the actual results. So in theory, investors are punishing the companies that like to under promise and over deliver.
Luckily for the bulls, coming into the earnings event, Qualcomm stock was near an all-time high and close to its Dot Com bubble level. It came into it up 52% year-to-date, which is double that of the Invesco QQQ Trust (NASDAQ: QQQ ). So the price action setup favored the downside scenario.
In fact, I actually shorted the event via a put position. This wasn't a knock against the company's prospects but rather betting on the binary event reaction. QCOM management is competent so I knew they would beat the expectations. But I felt that the prices demanded perfection from the report.
Before you label me a hater, I wrote about going long QCOM stock as it showed relative strength in early March. The trade paid very well so I am not a perma-bear. I trade around the price action.
So is it a good place to catch the falling knife? Not yet.
Recently, the Apple (NASDAQ: AAPL ) settlement headline caused an insane rally in QCOM stock. The downside of having had that spike is that it sets up the potential for serious disappointment. Those who recently bought the rally are weak hands and they will sell out of their positions very fast at the first sign of trouble.
So there is not a strong footing anywhere near these levels, even after the dip on the headline. There is very delicate support around $80 per share, but then there is the pull from a massive gap to $71 per share.
Although this is not a forecast, this dip could target filling the gap. This is a viable scenario that could unfold here, especially if the markets continue to fall like they did Wednesday afternoon.
Bottom Line on QCOM Stock
The Federal Reserve Chair Jerome Powell spooked equity investors as he refused to commit to cutting rates. This is a silly request from the traders, nevertheless, it caused real price action. So if the tizzy lingers, then the QCOM stock dip will too.
This also depends on the trader time frame. If the intent is to own QCOM shares for a really long time, then you can nibble down 5%. But for most traders who prefer starting out green, I'd wait out the first down candle, especially when it's this big.
The fundamentals are relatively healthy for QCOM. But the stock is not cheap as it sells at a price-to-earnings ratio of 56X. So there is a bit of froth it can shed. But we learned that the company will get about $4.5 billion from Apple, so that should go a long way toward supporting the stock price action this week.
Technically, there should be support before QCOM stock fills the gap below; $76 per share was pivotal from last September, so it should provide support on the way down. Both bulls and bears will want to fight it out hard thereby creating price congestion.
In the long run, QCOM stock will rise with the stock market. This is a successful company that just settled its dispute with the largest company on the planet. And it will continue to be successful. So there is no reason to short QCOM's future and the stock will recover after the earnings tizzy is done.
The better entry points into the stock would be at pivot zones and those are at $80, $76 or $68.
Nicolas Chahine is the managing director of SellSpreads.com . As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
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