Chip giant Broadcom Inc. (AVGO) reports second quarter metrics after Thursday's closing bell, with analysts expecting earnings per share (EPS) of $5.20 on revenue of $5.7 billion. The stock surged to an all-time high after beating first quarter estimates and reaffirming 2019 guidance in March, and it added to gains into May's all-time high at $323.20. It sold off on heavy volume into early June and is now trading about 40 points below that lofty level.

The stock sold off in sympathy with the broader chip sector, reacting to headwinds generated by the breakdown in China-U.S. trade talks. The Asian nation has now embarked on a multi-year program to increase local semiconductor production, raising oversupply concerns for Western manufacturers. In addition, China is likely to retaliate against big tech if the trade war escalates into the second half of 2019, increasing barriers that lower profitability.

AVGO Long-Term Chart (2009 – 2019)

Long-term chart showing the share price performance of Broadcom Inc. (AVGO)
TradingView.com

Singapore-based Avago Technologies bought Broadcom Corp. in 2015, creating Broadcom Inc., which adopted Avago's chart when the transaction closed in February 2016. That company came public on U.S. markets in the mid-teens in August 2009 and turned higher, topping out at $19.00 a few weeks later. It cleared that resistance level in March 2010, entering a strong trend advance that ended near $40 in the summer of 2011.

Price action then eased into a narrow consolidation, ahead of a 2013 breakout that generated the most prolific upside in the stock's relatively short public history. Buying interest dried up near $150 in 2015 and resumed after the 2016 acquisition, lifting in a graceful series of higher highs and higher lows that reached $286 in November 2017. Price action carved a rounded correction in the next 15 months, returning to the prior high in February 2019.

A March breakout posted an all-time high above $320 in May and reversed, failing the breakout a few weeks later. The $280 level now marks the first pullback to resistance after the breakdown, with aggressive sellers likely to return in force around that price zone. In turn, the barrier tells informed market players that the company probably needs to handily beat estimates and raise guidance to attract the firepower needed for the stock to trade above $300.

The monthly stochastic oscillator crossed into a long-term buy cycle in May 2018 and reached the overbought level in February 2019. It has now crossed into a sell cycle that has stretched into the panel's midpoint, predicting that bears will control price action into the third quarter. Taken together with the failed breakout, it's hard to recommend buying this stock, even if it rallies after this week's confessional.

AVGO Short-Term Chart (2017 – 2019)

Short-term chart showing the share price performance of Broadcom Inc. (AVGO)
TradingView.com

A Fibonacci grid stretched across the uptrend that started in July 2018 highlights May's bearish island reversal while placing the corrective low between the .50 and .618 retracement levels. The stock reversed after filling the May gap on Tuesday and has crossed back under the 50-day exponential moving average (EMA), which was broken on May 13. This progressively bearish structure predicts that last month's low will get tested, with good odds for a secondary breakdown through $250.

The on-balance volume (OBV) accumulation-distribution indicator supports this bearish view, topping out at a new high in 2017 after a healthy accumulation phase and breaking out above that level in March 2019. It failed the breakout two months later and has just bounced back to resistance, raising the odds for a reversal and continued distribution phase that may continue through the summer months.  

The Bottom Line

Broadcom stock hit an all-time high in May and sold off more than 70 points after the breakdown in trade talks. It has now bounced back to resistance and could sell off after Thursday's report, potentially dropping below $250.

Disclosure: The author held no positions in aforementioned securities at the time of publication.