Micron Technology, Inc. (MU) shares more than doubled in price last year, but recent technical weakness could signal an intermediate correction that traps the momentum crowd. That decline will face a major reality check in the mid-$30s, with a breakdown opening the door to much steeper downside. Given potential headwinds, it makes sense for shareholders to review positions, tighten stops and take other measures to protect hard-earned profits.
The uptrend has not tested the rising 200-day exponential moving average (EMA) since August 2016, highlighting one-sided price action that may now have run its course. In addition, the PHLX Semiconductor Index (SOX) finally reached resistance at the 2000 bubble high in November 2017, signaling a potential climax that could end the sector's dramatic uptrend. Micron stalled at the same time due to correlation that may have greater power over 2018 price action than technicals or fundamentals. (See also: SOX Semiconductor Index at 17-Year Resistance.)
The memory chip giant has a long history of grinding through massive boom-bust cycles that wipe out several years of profits in relatively short time frames. For example, the 13-month decline that began in December 2014 posted losses in excess of 35 points while retracing more than 80% of the 2012 into 2014 uptrend. A similar pullback from the current uptrend would yield a decline into the mid-teens.
MU Long-Term Chart (1995 – 2018)
A long-term uptrend stalled in the upper $40s in 1995, yielding a pullback that found support in the single digits in 1996. The stock turned higher in 1998, breaking out at the start of the new millennium in sympathy with the internet bubble infecting world markets. That buying impulse stalled a few months later in the mid-$90s, giving way to a brutal sell-off that cut through the 1996 low and dropped the stock to a nine-year low at $6.60 in 2003.
It underperformed badly through the mid-decade bull market, stalling in the upper teens in 2004 and failing to break out above that level in a 2006 test. The subsequent decline intensified through the 2008 economic collapse, with the stock finally ending the vicious nine-year downtrend at a 16-year low in March 2009. It took more than four years for the subsequent recovery wave to complete a round trip into the 2006 high.
A breakout into 2014 made limited progress, stalling in the mid-$30s and rolling over in a selling wave that cut through support in 2015. The single digits came into play once again in early 2016, highlighting the vicious boom-bust cycle, with a powerful trend advance off that level mounting the 2014 high in September 2017. The rally ended near $50 in November, right at the 50% retracement of the 2000 into 2009 downtrend. (For more, see: Micron's Sell-Off Presents an Opportunity: MKM.)
MU Short-Term Chart (2012 – 2018)
A pullback into December 2017 ended at the .382 Fibonacci rally retracement level, giving way to an A-B-C pattern that posted a six-week high earlier this month. A trendline marks pattern support at $41.50, with a breakdown likely to trigger a swift decline into the mid-$30s. In turn, that selling impulse would generate the first test of 200-day EMA support in the past 17 months. That level also marks support at the 2014 high, significantly raising the stakes for Micron bulls.
On-balance volume (OBV) tracked price action into the 2014 peak, while heavy distribution into 2016 held high in the multi-year range. The indicator broke out with price in the second half of 2017, peaking in November and dropping into a test of support at the prior high. It bounced but has now reversed off the November peak and could test support once again. This distributive action dovetails with a monthly stochastics sell cycle, raising the odds that bears will take control into the second quarter.
The Bottom Line
Micron Technology stock reversed after the PHLX Semiconductor Index reached heavy resistance at the 2000 bubble high, and Micron shares could enter an intermediate correction that tests support in the mid-$30s. A breakdown through that level could generate much stronger downside, given the stock's boom-bust cyclical tendencies. (For additional reading, check out: 2018 Will Be Mixed for Chipmakers: Morgan Stanley.)