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Since forming a double-bottom pattern back in January and February, chip manufacturer Maxim Integrated Products (NASDAQ: MXIM) has gained 25% from the low in early February. That is an impressive run for the stock, but it might be ready for a pullback and there are several factors that lead me to think this is the case. While I see a slide in the short term, the long-term prospects are still bullish in my view.
Looking at the daily chart, we see the double-bottom formation from February with Maxim Integrated stock hitting $30 in mid-January and early February. The high in between the two lows came in the $33.50 area. Once it broke above the top between the lows, it has moved higher ever since.
What we see on the chart now is that the daily stochastic readings have reached an overbought level and appear as if they might be rolling over. We also see possible resistance just overhead at the $38.50 level which was the site of a double-top formation in December.
While these factors show why I have a bearish short-term outlook for Maxim Integrated shares, the weekly chart shows some bearish drivers as well. The weekly stochastic readings are in overbought territory and the 10-week RSI is approaching the 70 level. We also see that the stock has formed a pretty solid trend channel over the last three years with one move above the upper rail and one move below the lower rail.
We see that when the weekly stochastic readings have hit overbought territory, the stock has also been hitting the upper rail of the channel or was above the rail the one time. These instances also coincided with the RSI hitting 70. Each time these three things happened, the stock pulled back to the lower rail before resuming the rally. Right now the lower rail is down below $31, but it is climbing.
Looking at the sentiment toward Maxim Integrated stock, investors are relatively bullish on the stock as evidenced by the short interest ratio of 2.28 and the analysts’ ratings. There are 15 “buy” ratings on the stock along with 10 “holds” and two “sells.”
Here is how I would play Maxim Integrated right now. I would look to short the stock with an expected move down to the lower rail. Once it gets down to the lower rail, I would look to buy the stock with an expected move back up to the upper rail.
If you don’t like shorting stocks and would like to own Maxim Integrated shares, just not at the current price, you could sell put options at the strike prices of $33 or lower. You collect the premium and if the stock falls below the strike price of the options you sold, the stock gets put to you and you own it at a lower price.
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