The S&P futures are trading higher this morning on news that China is saying that the U.S. & China have agreed to rollback “existing additional tariffs” simultaneously (and in the same proportion) once the Phase One deal is signed. We’re not sure exactly what the term “existing ADDITIONAL tariffs” means. Does it include all the tariffs the two countries have imposed since Mr. Trump became President in the U.S…or does it mean the most recent “additional” tariffs? As of this writing, we cannot find the answer to this question……Either way, this is a positive development for the stock market…we’re just not sure just HOW positive it is quite yet…especially since the stock market is getting overbought on a short-term basis…after its most recent strong bounce.
There is another reason why we need to get more details about this Phase One deal. The more we hear, the more it is becoming apparent that the President is only getting things that China has been willing to give us since the beginning (the purchase of more agricultural products). This would be quite disappointing in our opinion…and it would reinforce our thought that the President is caving-in now…due to the upcoming impeachment hearings and the 2020 election.
As we’ve said in the past, we’re not trying to use this issue to bash President Trump in the way “the left” likes to do all of the time. We believe that several of the policies that the President has been able to implement have been helpful to the economy & the markets (i.e. corporate tax cuts, deregulation, etc.). Therefore, Mr. Trump can and should take credit for those policies. However, it sure looks like it’s going to be a BIG stretch for him to declare victory on this China issue. In reality, he’ll only be able to legitimately claim that he solved a problem that he himself created…because he has not made any REAL progress on the issues that he (and everyone else) has been complaining about for so long (i.e. intellectual property, etc.)
Again, we’ll have to see the details of the Phase One deal…to determine if it will be strong enough to help the stock market rally further than it already has over the past month…given that it has become overbought on a near-term basis. With this in mind, we’d like to concentrate on one stock that should be at the top of any trader’s list at ALL times…Micron Technology (MU). If you’re into making money by trading around specific stocks over a period of time, MU is something you should always be keeping an eye on. We’re not just talking about day traders. In fact, MU is a better stock to “trade” for multi-week moves.
One thing is for sure, MU is NEVER boring…and it is very liquid. It never trades in a tight range. It either rallies strongly over several weeks…or declines in a similarly (and compelling) fashion. In fact, over the past 24 months, the stock has seen a full 14 multi-week rallies of more than 10%. Many of those rallies were much more than 10%...with several more than +30% (and one more than +50%)!....On the flip side, after those rallies of the past two years were complete, they were ALWAYS followed by significant declines of 10%-20% over the following several weeks!!! In other words, MU is a trader’s dream!!!!!
Of course, it’s always hard to get the exact top or exact bottom in any stock, but given how large these moves have been, traders have been able to profit quite well in both directions over the past two years…even if they missed the exact turn in the stock. Needless to say, this should lead one to ask, “Which way is MU going to move next?”…..Well, the semiconductor group as a whole has obviously seen a nice run recently…and last nights earnings out of Qualcom (QCOM) shouldn’t hurt it today either. However, the SMH semiconductor ETF is starting to get overbought on a near-term basis. It’s not quite as overbought as it was at the highs in April or July, so it could still rally a bit further, but we wouldn’t be surprised if it took a “breather” at some point soon. So this tells us that the group and MU itself are becoming vulnerable to a short-term pull-back.
MU is also coming off of an overbought condition from the beginning of the week...and it has declined almost 4% over the past two days. Of course, this does not guarantee that it’s going to roll-over in a more meaningful immediately…and it is trading higher in pre-market trading this morning.
However there is one level we’ll be watching for clues on this subject. That level is MU’s 50 day moving average (50 DMA). That line has been very important all year for the stock (in both directions). If it tests that line to the downside and holds, its usually followed by decent sized bounce. However, when it finally breaks that line to the downside (like it did in April 2018, July 2018, may 2019 and September 2019), it has been followed by a compelling (further) drop. (The exact opposite is true in the other direction when MU is below its 50 DMA…but since it is above that line right now, we won’t focus on that scenario.) Therefore, we’ll be watching that moving average (which stands at $46.75 right now) very, very closely. Whichever way it “breaks” after testing that level could/should be followed by a substantial move. (In fact, more sophisticated investors might consider using a “straddle” in the options market if/when MU tests its 50 DMA again.)
The most recent move above the 50 DMA was “only” 9%, so maybe that line will provide strong support if/when it retests that line again…and lead to another pop in the stock. However, if (repeat, IF) it breaks below that line in any material way, it should be a sign that it’s going to experience another pronounced down-draft……..We’d also note that any further weakness in MU would also give it a classic “head & shoulders” pattern. The “neck-line” of that pattern comes-in at the $41.75 level. That’s still 10% below current levels, so we don’t want to dwell on this possibility too long just yet. However, the MACD chart also shows that it is curling over at a lower level than in September (which rolled-over at a lower level than July). When you combine that with the fact that MU is one of the more volatile ones in the market place, that “neck-line” is something we’ll keep a close eye on if it does indeed break below its 50 DMA in any compelling way.
You’re probably tired of me writing about “critical junctures” in the market place recently, but what I’m trying to point out this morning is that MU is at one of those critical junctures right now. If the history of the past two years is any guide, the stock should see a powerful move in one direction or the other as we move towards the end of the year. If it can bounce off its 50 DMA…and break back above its September highs (thus giving #MU its FIFTH “higher-high” of the year), it should be very bullish for the stock. If, however, it breaks below its 50 DMA, it should mean that it’s going to see another compelling decline…and if it breaks below the “neck-line” of that “H&S” pattern, the decline could turn into a powerful one.
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Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.