Get Ready for a Potential Pullback in This Chipmaker

Nvidia (NVDA) is the market-leading microchip manufacturer. It has dominated the headlines this year with its eye-watering gains.

But while other chipmakers live in NVDA’s shadow, some have still delivered shareholders very handy profits.

One of those is Intel (INTC), which is up around 70% for the year.

INTC even saw a 40% surge this past month off the back of its Q3 earnings beat.

But now it’s looking overbought and is in danger of a correction.

Let’s check out its chart to see how things might play out from here…

A Buying Surge

The 50-day moving average (MA, blue line) in the chart below shows that INTC was trading in a sideways trend coming into the start of this year.

But as INTC’s rally gradually took hold, the 50-day MA slowly turned higher in March. Then it transitioned into an upward trend.

Intel (INTC)

Source: eSignal

INTC’s rally from March onward experienced a succession of higher lows and higher highs. (This is a common bullish pattern.)

Each of the moves up to higher highs coincided with two bullish signals:

1. The relative strength index (RSI) broke up through resistance (green line). Then it started tracking in the upper half of its range.

2. The 10-day MA (red line) broke above the 50-day MA with both MAs tracking higher.

But today I want to concentrate on what happened at each of those peaks.

As the chart shows, INTC topped out whenever the RSI made an inverse “V.” Then the RSI tracked lower from overbought territory (upper gray dashed line).

Sometimes it was a sharp inverse “V” like in January, June, and July.

But in other months, like April and September, the RSI tracked in overbought territory for a brief period before heading lower.

The most recent down move after the September peak (right orange circle) saw the RSI track down to oversold territory at the lower gray dashed line.

But the RSI formed a “V” and rose strongly, allowing INTC’s current rally to get underway.

Take another look:

Intel (INTC)

Source: eSignal

That move coincided with INTC initially gapping higher. Then it surged even more after the announcement of Q3 earnings.

You can gauge the strength of that jump by the sharp angle of the 10-day MA moving above the 50-day MA.

Yet that strong buying momentum put the RSI into overbought territory again.

So what am I looking for next?

Waning Momentum

When a stock rallies as strongly as INTC (40% in a month), it becomes increasingly difficult to maintain that strong momentum.

Buyers worry that a pullback could be in the cards and grow more hesitant to pile in.

And that can become self-fulfilling.

Recently, the RSI formed an inverse “V.” Yet as we shared above, the RSI doesn’t always have a sharp downturn right away. That’s why what happens next will be key.

If the RSI breaks lower toward support (green line), INTC could trade back around $42.

That could hand us a quick short trade against the prevailing uptrend.

For a bigger move to the downside, the RSI would have to become stuck in its lower range. Then the 10-day MA would need to cross back below the longer-term 50-day MA.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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