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Semiconductor stocks have been falling for the last two months. Xilinx (NASDAQ: XLNX) is no exception.
Since the beginning of June, Xilinx stock has fallen over 16% to its low on July 27. However, there are some developments on the charts that make me think the stock is getting ready to bounce higher.
On the daily chart we see that both the 10-day RSI and the stochastic readings are in oversold territory, with the RSI reaching one of its lowest levels for the past 10 months. It also caught my attention that the RSI has been hovering in oversold territory for a good part of July. That’s similar to what we saw in January, just before the stock rallied over 20% from February through May.
The weekly chart also provided some ammunition for a bullish case, as we see an upward sloped trend line that connects the lows from the past year. The stock hit the trend line this week and then rebounded slightly.
The weekly oscillators are also worth looking at, as the stochastic readings are in oversold territory for only the third time in the last 3 ½ years. The 10-week RSI isn’t in oversold territory yet, but it is close. The RSI has only hit oversold territory once in the last 3 ½ years and that was in mid-October. The stock rallied almost 30% from mid-October through early December.
What is really interesting is how if we extend out the downward trend line that dictated trade in 2014, it is intersecting with the upward sloped trend line connecting the lows from the past year. The downward sloped trend line was broken in April when the stock moved up above $48.
Xilinx just released its second-quarter earnings report last Thursday. The company beat the EPS estimate, but came up a little short on the revenue projections. It earned $0.55 per share on revenue of $549 million. Estimates were for earnings of $0.53 per share on $555 million in revenue. The stock dropped 2.5% on Friday as a result of the revenue miss.
One reason the reaction to the revenue miss may have been muted to a degree is that the stock wasn’t well thought of heading into the earnings announcement. There are 26 analysts following the stock, with eight rating it a “buy,” 17 rating it a “hold” and one rating it a “sell.” The short interest ratio was at 3.5 and the number of shares sold short jumped from 9.4 million to 11.22 million from June to July. These stats tell us that the sentiment toward Xilinx stock was relatively bearish and were turning more bearish.
Given the oversold levels on both the daily and weekly charts, and the moderate dip after the earnings report, I think the worst is over for Xilinx. I look for the stock to bounce over the coming weeks and to challenge the May high of $48.73 by the end of the year. I would protect the downside with a stop-loss in the range of $38.
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