L.A.'s article appeared in TheStreet.com on 02/08/2010

Dead money! That’s how you have to refer to any money you may have invested in Qualcomm (QCOM) prior to its earnings debacle. I feel compelled to come back to this name today because it was a huge disappointment and since I have twice written about it and traded it numerous times over the past three months. Fortunately, I was not in QCOM when it reported earnings although it wasn’t the result of some grand foresight. It was due to a change in the general market direction over the past three weeks as well as the behavior of the stock itself. There is a lesson to be learned in every trade and the reason for revisiting QCOM today is to illustrate how this debacle could have been sidestepped and to discuss what a trader should do with the stock that is now officially dead money.

When the tenor of the market changed about three weeks ago, many traders rounded up their wagons and became more defensive. I was no different. I cut long holdings (selling any and all positions that appeared marginal) and raised cash levels while simultaneously initiating purchases of inverse ETFs to hedge what positions remained. That is what you have to do when a confirmed directional change occurs in the markets (Note: On RealMoney.com I write a weekly series called Follow that Trade where I have detailed these risk mitigation strategies and our implementation of them).

In reflection, QCOM did provide signals to take profits and cut losses prior to the earnings report. In the last article I posted , I spoke of the likelihood that QCOM would break higher a month ago and that the measure of the break would be confirmed if volume expanded. It didn’t as shown below.

QCOM Weekly

Charts by ProphetNet.net

When prices did break higher and volume did not expand to confirm the break, that was a warning sign. When you get a warning sign, you have to be careful. The next sign was when the general market and the big cap technology stocks began to sell off – QCOM being one of them. Those two warnings signs should have made any holder of QCOM go back to the charts and try to piece together an alternate view. If you had done so, you would have seen the AB=CD pattern that had completed. That was a clear indication to exit. That would have saved an enormous amount of grief and lost coin.

The issue now for holders of QCOM is what to do after this painful decline. The first technical rule is a violent decline such as this is to use the first push back to the gap down area as an exit point. The reason for this is that the supply line now is huge. Consider the fact that you now have everyone who bought this stock since April of ’09 in a losing position. That is a tremendous amount of stock.

Looking at the daily chart, you can see the two probable areas where significant selling will likely materialize.

QCOM Daily

Charts by ProphetNet.net

The real issue is how low it can go if you hold on. Here’s the monthly chart.

QCOM Monthly

Charts by ProphetNet.net

The problem is the volume expansion on the monthly chart as the break out swing point is tested. With volume expanding into that breakout area, the odds of a further decline on this time frame increases. Volume in February will run heavy as well which is another sign of deterioration on this chart. That leads one to search for support at lower prices and that support lies between $32 and $35. I would expect QCOM to trade into that target zone before this decline is done.

It is never easy to suffer a decline, and believe me, I’ve been through more than a few. Over time, one tends to get better in their technical reads and they tend to reduce exposure when warnings signs appear. You cannot sidestep every major decline in every stock but you can reduce the numbers by carefully analyzing the information that the market releases on a regular basis. If you are one of those who did get stuck in QCOM, your best bet is to at least lighten up on the first opportunity. You will almost certainly get the chance to buy it back at the same or at a better price down the road if you choose. There is an opportunity cost associated with leaving your money as dead money for an extended period of time. When trying to decide if you should sell or hold a position, then ask yourself the following question, “Would I buy/sell short this position currently?” If you can’t answer in the affirmative, then you know it is time to move on. Until next time, keep trading the charts!

Originally published on TheStreet.com
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