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Will Support Hold For Micron Technology?

07/14/11 08:23:48 AM
by Donald W. Pendergast, Jr.

When the broad market is falling fast, it pays to keep an eye on a stock's price behavior as it approaches a major support level.

Security:   MU
Position:   N/A

Shares of Micron Technology (MU) have really been hammered over the past 10 weeks or so, dropping by more than 38% (38.2%, to be precise, a major Fibonacci ratio) in that modest length of time. With a new Rahul Mohindar oscillator (RMO) swing sell signal now having printed, will the stock's negative momentum and money flow trends overpower the major support area near $7.10 to $7.20, possibly crashing down to even lower price levels?

FIGURE 1: MU, DAILY. Judging from the massive breakdown coming out of the large pennant pattern, it will be fascinating to see whether this market views the lower end of the $7 price range as an exhaustion price target or as the launching pad for further weakness on a heavy volume selling spree, should that green shaded support zone give way.
Graphic provided by: MetaStock.
There isn't too much bullish news emanating from Figure 1; intermediate-term money flow (CMF)(34) is very weak and far below its zero line, even as the seven-period Aroon down indicator (red component of the complete Aroon indicator at the bottom of the chart) has now risen to its maximum possible bearish reading of 100. The fact that a new RMO swing sell signal has just fired on MU's daily chart only seems to add fuel to the bearish fires currently raging under this stock. The green shaded horizontal line is the primary support area that needs to hold fast if MU shares expect to enjoy any sort of recovery rally in the near term.

Since the stock now appears to be in the midst of a retest of the lower portion of that range, this might be an excellent time for savvy daily- and intraday-based traders to watch what happens if $7.10 holds -- or not. There will most likely be some excellent short-term trading opportunities here, no matter if the stock rebounds or simply continues to slide southward.

FIGURE 2: MU OPTIONS. Bid-ask spreads on MU calls and puts appear to be fairly close, and with decent liquidity, which is a big plus for short-term traders.
Graphic provided by: Thinkorswim.
Really savvy option traders might want to consider selling an out-of-the-money, August 2011 $7.00 put option for $0.30 or better, especially if they believe that the $7.10 support zone is indeed destined to hold back any and all near-term declines (Figure 2). If you choose to go this route, be sure to cut losses quickly if the option's value should double in price; just buy it back and wait for the next trade setup. Conversely, if the option's value withers away to, say, $0.05, you might just want to play it safe and buy it back and keep your profit without enduring any further market exposure. The potential for a 37% annualized return (if the trade is held through option expiration) looks awfully attractive, but in the world of option selling, a good offense (aka: don't get too greedy) is almost always the best defense.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address:

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