Broadcom Limited (AVGO) has gone hostile in its bid for Qualcomm Incorporated (QCOM). Digital communications products maker Qualcomm turned down Broadcom's initial proposal, and the suitor has now proposed its own slate of 11 directors to replace the current Qualcomm board. It could be a long battle, as Qualcomm's 2018 annual shareholder meeting will not be held until March 6.
Qualcomm is the top holding of the iShares PHLX Semiconductor ETF (SOXX), accounting for 8.96% of the fund's portfolio. Broadcom, which supplies a wide range of semiconductors for many global applications, is also within the top five components – together, the two companies make up 16.5% of the fund's holdings. Intel Corporation (INTC), at 8.93%, is currently the ETF's second largest holding.
The Philadelphia Semiconductor Index (SOX) opened Thursday at 1,227.74, up 34.3% year to date and solidly in bull market territory at 49.9% above is post-election low of 812.33 set on Nov. 10, 2016. The SOX is an economic indicator, as almost every product we buy contains computer chips, from our motor vehicles to our hand-held devices. The SOX set its all-time high of 1,342.05 on Nov. 24 and is down 9.3% since then, which is an early sign of economic weakness. (See also: SOX Semiconductor Index at 17-Year Resistance.)
Broadcom shares opened Thursday at $275.70, up 56% year to date and in bull market territory at 71.6% above the post-election low of $160.62 set on Dec. 2, 2016. The stock is down just 3.5% since its all-time intraday high of $285.68 set on Nov. 27. Meanwhile, Qualcomm opened Thursday at $65.40, up just 0.3% year to date and in bull market territory at 33.7% above its post-election low of $48.92 set on Sept. 8. The stock is down 6.9% since its all-time intraday high of $70.24 set on Dec. 13, 2016.
Shares of Broadcom opened higher on Thursday after the company beat earnings estimates when it reported results after the closing bell on Wednesday. The stock traded as high as $280.64 in pre-market trading this morning on strong wireless chip demand.
The daily chart for Broadcom
The daily chart for Broadcom shows that the stock has been above a "golden cross" since Dec. 21, 2015, when it closed at $145.80. A "golden cross" occurs when the 50-day simple moving average (SMA) rises above the 200-day SMA, indicating that higher prices lie ahead. Today, the 50-day SMA is $259.05, with the 200-day SMA at $241.80. (For more, see: Top 4 Broadcom Shareholders.)
The weekly chart for Broadcom
The weekly chart for Broadcom is positive, with the stock above its five-week modified moving average of $265.85. The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week at 78.83, up from 77.60 on Dec. 1.
Given these charts and analysis, my trading strategy is to buy weakness to my quarterly pivot of $261.97, which was doable earlier this week, and to reduce holdings on strength to my semiannual and monthly risky levels of $275.69 and $282.02, respectively. The semiannual level of $275.69 was tested at today's high of $275.70.
The weekly chart for Qualcomm
The weekly chart for Qualcomm is positive but overbought in anticipation of the Broadcom hostile takeover. The stock is above its five-week modified moving average of $62.35. Note how the stock has been trading back and forth around its 200-week simple moving average, or "reversion to the mean," since the week of Jan. 30, 2015, with the average now at $62.95. The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week at 86.55, well above the overbought threshold of 80.00.
Given these charts and analysis, my trading strategy is to buy weakness to my quarterly, semiannual and monthly value levels at $58.41, $56.54 and $55.38, respectively, and to reduce holdings on strength to my weekly and annual risky levels of $70.27 and $84.45, respectively. (For additional reading, check out: Qualcomm: Stifel Downgrades, Despite Broadcom.)