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Qualcomm: Bullish Breakout Attempt Underway

09/06/13 04:07:17 PM
by Donald W. Pendergast, Jr.

Shares of Qualcomm Inc. are breaking above a key resistance zone, with more gains likely in the days ahead.

Security:   QCOM
Position:   N/A

Qualcomm Inc. (QCOM) shares completed a major multicycle low on July 9, 2013 and have rallied steadily since then; after a brief period of consolidation, the stock is now breaking above its 20- and 55-day price channels, even as it breaks above a previous daily swing high. Here's a look at QCOM's daily chart (Figure 1).

Figure 1. According to a variety of technical and fundamental measures, shares of Qualcomm Inc.(QCOM) may be on the cusp of yet another bullish swing move.
Graphic provided by: TradeStation.
A rally of 15% over a two-month timespan in a large cap stock may not sound all that exciting, but considering the recent turbulence in the major stock indexes, any stock that has managed such a feat might be worth further investigation. QCOM has not only been able to turn in nice gains over the past nine weeks, but it is now attempting to tack on even more gains as it begins to break above several key resistance zones; a combined 20- and 55-day channel breakout and its previous swing high of 67.65 (made on April 10, 2013). This breakout attempt becomes even more interesting when you also consider the following details:

1. QCOM has managed to meet and/or beat analyst earnings expectations in nine of its past 11 quarters.
2. Long-term money flow (as measured by the 89-day Chaikin Money flow histogram, [(CMF)(89)] is wildly bullish, indicating that the "smart money" is still on board, hoping for further gains, even as retail investors also begin to pile in again.
3. QCOM is outperforming the S&P 500 index (.SPX) over the past 4- and 13-week periods.
4. The latest cycle low in the stock appears to be of a "major" variety, also hinting that more substantial gains are to be seen before the cycle peaks again.

Taken as a whole, this is a very attractive stock on both a fundamental and technical basis, and one of the simplest ways to play QCOM's persistent strength is to put on a near-term covered call trade.

Figure 2. QCOM's October '13 $67.50 call option looks like a great component of a near-term, momentum-driven covered call play in Qualcomm Inc.
Graphic provided by: TradeStation.
Graphic provided by: TradeStation Options Analysis.
The covered call play goes like this:

1. If QCOM closes above 67.74, buy 100 shares of QCOM at the next session's open.
2. At the same time, sell the October '13 QCOM call option — it's currently going for 1.97 ($197 per call). This call has an open interest figure of 16,233 contracts, a very close bid/ask spread, and a daily time decay factor of $2 per day.

3. Once in the entire position, simply trail everything with a 21-day exponential moving average (EMA) of the daily closes in QCOM; a daily close below the EMA at any time before options expiration (at the close of trading on Friday October 18, 2013) means you simply close down both sides of the trade and wait for another low risk trade setup.

By keeping your account risk at about 1% on this covered call play, you'll also be managing your risk exposure in a responsible way, even as you avail yourself of a steady stream of potentially profitable trade setups like this one. Trade wisely until we meet here again.

Donald W. Pendergast, Jr.

Freelance financial markets writer and online publisher of the S&P 500 Weekly Forecast service.

Title: Market consultant and writer
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