Intel forms tradable pattern but remains in a powerful downtrend

Since mid-August Intel’s stock price has fallen more than 27% and in doing so it has begun to trace out a potentially bullish Falling Wedge pattern that could provide a decent opportunity for traders. However longer-term investors looking to buy the company should wait for a better entry point since the stock remains in a powerful downtrend.

Potential short-term trading opportunity

Intel’s stock price peaked on 3 May this year at $28.72 whereupon it began a significant downtrend that gathered pace in mid-August. Since then the company’s stock price has fallen more than 27% and the chart below shows, it has begun to trace out a potentially bullish Falling Wedge pattern that could provide a decent opportunity for traders.

A Falling Wedge pattern is a bullish chart pattern that begins wide at the top and narrows as the price declines. There are two types of falling wedge pattern, a continuation pattern which moves against the prevailing uptrend, and a reversal pattern which moves with the prevailing trend (as with Intel). Both are regarded as bullish and in both cases the falling wedge slopes downward.

A 6 month chart of Intel Corp. (Click on the chart for a larger version)

A 6 month chart of Intel Corp. (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

The narrowing of the cone-shaped pattern indicates a decrease in downside momentum, and although it is only very slight in the case of Intel, it is confirmed by both the Money Flow Index (MFI) and the Rate-of-Change (ROC) indicators.

The Money Flow Index (MFI), also known as volume-weighted RSI, is a momentum oscillator which is tied to volume and is used to identify reversals and price extremes. Meanwhile the Rate-of-Change (ROC) indicator is a pure momentum oscillator that measures the percent change in price from one period to the next. Both indicators (circled) confirm that downside momentum is decreasing.

How to profit from a breakout in Intel

Those looking to profit from this potentially bullish chart pattern could do so by going long a breakout that was accompanied by a significant increase in volume. Only when an upside breakout is observed will the pattern be confirmed as bullish, however it would not be unusual to see one more test of the upper trend line before a breakout occurs.

The price target for a possible breakout is calculated by adding the widest part of the wedge onto the breakout price and a breakout at the $19.50 level would give a target price of around $22.

The longer-term picture

Between November 2008 and May of this year Intel’s stock price rose 169.9%. Since then however, as the chart below shows, the company has been in a significant downtrend, and much of this decline has been against the prevailing trend of the market.

A 5 year chart of Intel Corp. (Click on the chart for a larger version)

A 5 year chart of Intel Corp. (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Intel is facing declining revenues and earnings from PC sales as consumers move to smaller devices such as tablets and smartphones which are predominantly powered by chips from competitors like ARM Holdings (NASDAQ: ARMH) or Qualcomm (NASDAQ: QCOM).

The company’s stock has now retraced half of the entire advance off its late 2008 low of $10.64 which has led some to conclude that it is now very good value.

There are certainly reasons to like Intel, not least the fact that it now pays a 4.5% annual dividend. In the third quarter of 2012 the company reported revenue of $13.5 billion, with a net profit of $3 billion and it also sells for a low p/e of 8.7.

The company also knows that it needs to play catch-up in the smartphone-chip market and it certainly has the money to deploy into research, development and acquisitions. As of 29 September it was sitting on $3,520 million in cash.

However longer-term investors would do well to remember the old adage “you should never try to catch a falling knife” since Intel is still in a powerful downtrend. Even if we do get an upside breakout out of the falling wedge pattern described above, we would need to see much more backing and filling before we could be confident that the stock had carved out a longer-term bottom.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>