In February 2001, shares of Intel (INTC) traded as high as $38.23, in the ten years since, they have never traded that high again. The stock has severely underperformed that average semiconductor stock. From the August 2010 low, the SMH has rallied 48% while INTC has advanced just 23% through Friday’s close. Perhaps it is time for INTC to catch up a little.
The chart below is INTC on a weekly timeframe, outlined on the chart is an inverted head and shoulders pattern with the neckline at approximately 24. I think it is a long shot, but if this pattern were to complete, the upside objective would be the height of head to the neckline above (approx 12 points) added to the breakout point (24) which would give a longer term upward objective of $36/share. Interesting information, but hardly something I would act upon by itself. If we break down the highlighted “right shoulder” in the daily chart below we can see another inverted head and shoulders pattern. A pattern within a pattern is referred to as a “fractal”.
INTC – WEEKLY TIMEFRAME
Below is the daily chart of INTC, you can see the clear shape of an inverted head and shoulders pattern on this timeframe as well. The ability to recognize patterns such as inverted Head and Shoulders pattern is good to know but understanding what it really represents, an orderly transition of a market controlled by sellers to a market where buyers regaining momentum is more useful. The area of resistance (known as the neckline) is the battle line where the transition from bearish, to neutral to bullish is completed. For INTC, a move beyond 22 will complete the inverted head and shoulders pattern and then the stock is “supposed to” make a move equal to the height of the pattern (22-18= 4 pts) added to the break past the neckline at 22, that would give a target for INTC of 22+4 = 26. That would be a nice move, but if it were to get through the 24 level, then the larger inverted head and shoulders pattern would then trigger the target of 36.
INTC – DAILY TIMEFRAME
Trading stocks based on patterns can be confusing, especially when there is a pattern within a pattern. The recognition of a pattern can be ambiguous and price targets based on “measured moves” can lead traders and investors to have a false sense of where the stock should go. The price objectives can be a distraction which incorrectly focuses the attention on “how much can I make?” instead of focusing on the most important aspect of “how much can I lose?” The upside targets aren’t useless, but if the stock triggers a buy above the neckline of 22 and then fails to follow through to the upside, a small loss should be taken before it is allowed to turn into a larger loser.
I think that INTC looks like a good buy above 22 and a reasonable place to put a stop below 21.30 (which is the low from last Thursday and the location of the rising 20 & 50 day moving averages). If the stock continues higher, the job is to raise stops up below the higher lows which develop, not to blindly hold out for a price target based on a technical pattern.