Will Qualcomm Break Out or Break Down?

02/25/2009 10:47 am EST

Focus: STOCKS

Jocelynn Drake

Financial Analyst, Schaeffer's Investment Research

Jocellyn Drake of Schaeffer’s Investment Research says the stock of the leading wireless provider is at a key inflection point, and investors need to watch which way it will go.

Qualcomm (Nasdaq: QCOM) skipped nearly 4% higher Tuesday morning following some positive broker comments. However, there is little room for additional upgrades for QCOM, as Zacks Investment Research reports that the shares have earned 13 Buy ratings, three Holds, and one Sell.

This configuration actually leaves the security vulnerable to potential downgrades should the equity continue to underperform the market.

Meanwhile, the average 12-month price target for QCOM stands at $43.27, according to Thomson Reuters. This estimate implies that analysts are expecting the shares to rally more than 32% during the next 12 months. (It closed at around $34.50 Tuesday—Editor.) Any price-target cuts from this smitten group could spell trouble for the stock.

UBS [said Tuesday] that the wireless chip industry remains too fragmented to generate profits, and further consolidation is necessary. UBS believes the eight 3G chip sellers today need to drop to four so "decent margins" can be sustained. Qualcomm will last, UBS says.

From a technical perspective, the stock has been grinding sideways along support at the $33.50 level since Dec. 8. The equity is also hitting resistance in the $37-$37.50 region.

Taking a longer-term look at the shares, the stock is currently struggling with overhead resistance in the form of its ten-week and 20-week moving averages (now in the mid-$30s—Editor). Since the beginning of September, the equity has [experienced] only two weekly closes above these moving averages.

Drilling down on the stock's sentiment backdrop, we find that investors are somewhat mixed on their outlook for the security. The Schaeffer's put/call open interest ratio for QCOM stands at an annual peak of 0.91, as put open interest nearly equals call open interest among near-term options. This lofty reading indicates that investors have not been more pessimistically aligned toward the shares at any other time during the past year.

On the other end of the sentiment spectrum, short sellers have avoided the security in the belief that it has put in a bottom. In fact, the number of QCOM shares sold short has dropped by 16% during the past two weeks to 35 million. This accumulation of bearish bets accounts for just 2% of the company's total float, offering little in the way of potential sideline money to help push the stock higher.

Overall, traders should keep a close watch on resistance at the stock's declining ten- and 20-week moving averages. A rejection at these intermediate-term trend lines could win back the short sellers, creating a fresh wave of selling pressure for the shares.

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