Poised at the Precipice

10/28/2009 11:10 am EST


Elizabeth Harrow

Director of Digital Content, Schaeffer's Investment Research, Inc.

Elizabeth Harrow of Schaeffer’s Investment Research says Qualcomm is testing major support levels as bearish bets flood in to the wireless giant’s stock.

Qualcomm (Nasdaq: QCOM) was pummeled by put players on Monday, with volume ramping up to more than twice the norm. About 60,000 puts crossed the tape, compared to expected volume of just 25,000. During the course of the day, traders on the International Securities Exchange (ISE) bought to open 25,927 puts, compared to just 1,870 calls.

As a result, QCOM's 10-day ISE put/call volume ratio now stands at a top-heavy 1.63. This ratio ranks higher than 97.6% of other such readings taken during the past year, suggesting that speculators have rarely shown a greater appetite for puts over calls. Likewise, QCOM's Schaeffer's put/call open interest ratio (SOIR) has crept higher, [revealing] that traders are growing more downbeat toward QCOM's prospects.

In keeping with this theme, short interest on QCOM ticked higher during the past month, bouncing back from a sharp decline. Specifically, the number of shares sold short climbed by 8.3% over the past month. In other words, it seems that option players aren't the only ones betting against QCOM

Drilling down on Monday's action, a massive block of 15,000 November 38 puts traded around 2:24 p.m. Also active on Monday was the November 40 put, with nearly 20,000 contracts changing hands. Implied volatility on this strike increased by 1% as a result of all the activity.

Both of these popular puts experienced a jump in open interest overnight—-the November 38 strike now has 27,920 puts in residence, up from 13,500, while open interest at the November 40 put surged from 13,920 to 29,372 contracts. With QCOM trading right around $41 at last check, short-term speculators are keeping their bets very close to the money.

On the charts, there's just cause for the up tick in pessimistic speculation surrounding QCOM. The equity has pulled back significantly from its late-July peak near $49, and the shares have underperformed the broader Standard & Poor’s 500 index (SPX) by a hefty 19 percentage points during the past 60 sessions.

As a result of its underperformance, QCOM has tumbled through former support from its 10- and 20-week moving averages. These two trend lines recently completed a bearish cross, and could now switch roles to act as resistance.

However, the $40 level could step up to provide a floor for QCOM's decline. This round-number region previously acted as support in May, and could now resume its role as a technical backstop. Plus, the heavy accumulation of put open interest at the November 40 strike could provide an additional, options-related boost as expiration draws closer.

During the coming weeks, traders will want to note QCOM's progress around this key round-number level. If the stock holds support at $40, an unwinding of bearish bets could fuel a short-term rally. (It closed at $41 Tuesday—Editor.)

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