(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Micron Technology Inc. (MU) is on the cusp of a major breakdown based on technicals, short interest, and the options market. Despite these warning signs, analysts have been of the opinion that memory chip prices still may not have peaked, leaving them with a positive view on shares of the chip maker. But Micron stock is currently sitting on a critical support region, with the risk of falling by more than another 15 percent. Shares are already off 15 percent since peaking in early June, with room to fall to potentially $23, from their current level around $27.70
Technical Breaking Down
Shares of Micron are up by nearly 107 percent over the past 52 weeks, and at one point, were up well over 130 percent. But the stock has cooled recently and appears to have topped out around the $32 to $33 region. At that level, the stock attempted to break above the range on three occasions and was unsuccessful, setting up a triple top, a bearish technical indicator.
The stock currently is on a path heading towards the gap created back at the end of March in an attempt to close it. The first true test of support is at $26, the base of the gap. If Micron falls below $26, the stock likely will head toward $23. Additionally, the widening Bollinger Bands, a technical measure of two standard deviations from the 20-day moving average, indicate an increasing level of volatility.
Short interest has risen by 32 percent since the beginning of May, to 55.14 million, signs of investors betting that shares of Micro will fall.
The options market is looking for the stock to fall as well, with the open interest in the month of October skewed to the puts, with 28,000 contracts open at $27 strike, another 21,500 at $26, and 28,500 at $25. While the calls see 34,000 open at $28, and 33,500 open at $30.
The $25 puts would need the price of Micron to fall to nearly $24 for the options to be profitable. The $30 calls are priced for the stock to rise to about $31.50, below the previous highs seen in June and July. That's an indication the market doesn't believe the stock can break above the previous highs.
The open interest in puts, the sharp increase in short interest, all coupled with a deteriorating technical chart, point to stock on the cusp of falling further. The downside risk, for now, appears to be around $23 should the stock fail to find support at $26.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.