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Over the last eight or nine months, computer hardware company NetApp Inc. (NASDAQ: NTAP) has been trending lower, with the stock losing almost a third of its value since last December. The downward trend for NetApp stock has been very organized and methodical, as you can see in the weekly chart.
The 13-week moving average has acted as resistance on several occasions so far in 2015, and now the stock is trying to close above the trend line for the first time since December. The stock was in oversold territory and has moved out in recent weeks, but it did the same thing back in April before the downtrend resumed.
If we look at the daily chart, we see a downward sloped trend channel that has dictated trade since the beginning of the year. With the stock near the top rail of the channel, and with the daily stochastic readings close to overbought territory and making a bearish crossover, it looks like the downward trend will continue.
Looking at the fundamentals for NetApp, it is easy to see why the stock is declining. The company is expected to see sales decline by 18.6% during the current quarter and fall 13.3% for the full year. That problem isn’t just with NetApp either, as the computer hardware industry as a whole expects to see a decline in sales of 7% for the year.
Given the technical picture and the fundamental backdrop, it isn’t surprising to see bearish sentiment toward the stock. The short interest ratio currently sits at 4.55 and analysts are very down on the stock. There are only three “buy” ratings on the stock compared to 26 “hold” ratings and five “sell” ratings. It is also worth mentioning that there have been five downgrades and only one upgrade so far this year.
Normally I look for opportunities on the downside when the chart is bearish, the fundamentals are bearish and the sentiment is bullish, but in this case the bearish sentiment toward NetApp stock seems warranted. Given the current market environment, I don’t see that helping the stock either.
Looking at the weekly chart, I think the stock gets back down below the $26 level at the very least. If the support from the 2012 low were to give way, the next level of support is all the way down at the $10 level, which was the low back in 2009.
I would look to short the stock at the current level and down to the $31 level with an initial target of $25.50. If that target is hit, I would consider closing part of the position and then leaving part of the position open to see if it can move even lower. As for a buy-stop point, I would use $32 initially and then keep an eye on the 13-week moving average. If the stock closes a week above that trend line, I would look to get out.
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