Micron Technology, Inc. (MU) shares rallied to a two-year high on Wednesday after Goldman Sachs upgraded the memory chip giant from "Neutral" to "Buy." The stock has posted impressive gains so far in 2017, lifting more than 50% prior to this morning's call. Even so, long-term technicals are waving red flags, warning sidelined players that it is the wrong time to buy the stock for market timing or investment accounts.

Unlike the broad swath of tech stocks trading near all-time highs, Micron still has not cleared heavy resistance at the 2014 high at $36.59, which is less than two points below this morning's opening print. This juxtaposition generates an adverse risk/reward profile because big highs in place for several years tend to trigger long-term reversals when they are finally reached after deep corrections. (See also: Micron's Stock Near a Breakdown.)

This reversal tendency is so strong that current shareholders are advised to take profits or tighten stops as the barrier approaches to lock in gains generated by the furious uptrend that began in the single digits in May 2016. Typically speaking, corrections starting at these highs require a minimum of three to six months to shake out weak hands, clean out overhead supply and complete the price structure needed to support a long-term breakout.

MU Long-Term Chart (1990 – 2017)

 

The stock entered a powerful uptrend in 1990, underpinned by rapid advances in silicon chip technology, and topped out at $47.38 in 1995. A decline into 1998 found support in the single digits ahead of a dramatic rally that posted an all-time high at $97.50 in July 2000, at the same time the dotcom bubble was bursting. Micron turned sharply lower with other tech stocks, descending to 1998 support in the first quarter of 2003. (For more, see: Intel, AMD, Micron May Outperform as Market Peaks.)

A bounce into 2004 made little headway, stalling in the mid-teens, with that level marking impenetrable resistance for the next nine years. The subsequent decline held the 2003 low into a 2008 breakdown that reached a 16-year low at $1.59 in November. That deep print finally ended the eight-year downtrend, giving way to a multi-legged recovery that finally mounted the 2004 high in the fourth quarter of 2013.

The uptrend ended in 2014 after the stock reached the .382 Fibonacci retracement of the long downtrend, giving way to a steep decline that undercut new support before committed buyers emerged in the single digits in 2016. It has been all upside since that time, with the stock carving a relentless recovery that has unfolded at the same trajectory as the prior decline. This buying impulse is now set to test resistance at the 2014 high. (See also: Analysts Bullish on Chipmaker Micron.)

MU Short-Term Chart (2014 – 2017)

 

A Fibonacci grid stretched over the downtrend into 2016 identifies key price levels during the subsequent bounce, with the bounce stalling in June 2017 at the .786 retracement level. Choppy sideways action in the past three months may now yield a final rally burst that reaches the prior high and sets off longer-term sell signals. As a result, informed market players will place trailing stops to protect profits on open positions.

On-balance volume (OBV) topped out in the second half of 2014 and entered an aggressive distribution wave that lasted into February 2016. It turned higher three months ahead of the price, generating a bullish divergence that reflected aggressive bottom fishing by strong hands. Continued upside has matched constructive price action, with the indicator set to reach the prior high in reaction to the next buying impulse. (To learn more, see: Uncover Market Sentiment With On-Balance Volume.)

The Bottom Line

Micron Technology stock could reach the 2014 high in the coming weeks, setting off major sell signals because that resistance level is likely to trigger a reversal lasting a minimum of six to nine months. As a result, sidelined players should avoid new long-term positions while shareholders tighten stops and consider taking profits. (For additional reading, check out: Micron Unaffected by Excess Chip Capacity: Citi.)

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

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