Breakaway or Exhaustion Gap?

Last week we saw the semiconductors get a boost of AI rocket fuel with Micron Technology earnings on Thursday. The MU chart is super interesting, so lets dive in.

MU consolidated below the $64.00 level for a full year before breaking out last May. It then formed a symmetrical triangle and remained range bound for another 6 months before it broke out last November. Since then it has been on absolute fire, gaining almost 56% to its recent high. Now I know semiconductor’s, the Covid pump, and crypto have jaded us traders into thinking 50% in 4 months is “just ok” but that’s a mind-blowing gain. The cool thing is that MU could still have some nice upside based on last week’s earnings and the subsequent gap.

The first thing we want to look at when we are analyzing a stock, is how to mitigate risk. Since MU has been on such a vertical tear, there are really only two big levels where we will know something is up with the bullish thesis. The first level is below last week’s bullish candle which has the biggest volume of any candle since the 2020 lows. This means that if MU closes strongly below that candle any time soon, it was likely an exhaustion gap, and not a breakaway gap. For long-term traders, the next level where risk could be mitigated is below the pivot at $79.00. There is absolutely no reason for MU to go below that level any time soon if it plans to remain bullish.

Now that risk mitigation is handled the next consideration is an entry point. There are a couple of different methods we can use to determine an entry. First would be the classic, simple and straight forward 50% retrace of a long day candle. The long day here would in fact be a long week and the 50% retrace is right around $101.60. This also lines up with a recent high from two candles ago.

Another way we can get an entry zone is buy using a fib retracement tool on what we think is the 3rd wave within the larger 3rd wave, which is where the bullish count we are working with assumes we are. This gives us a buy zone from $106.23 to $95.72 based on the theory that the 4th wave often retraces less than 38.2% in strong trends.

The final entry technique we will review is one that involves using the gap on the daily chart. Again, we can run a fib retracement tool on the gap and use the key levels to place the entries. Friday’s candle did not quite pullback to the .236 level and formed a nice little bullish candle. It would follow that if that candle breaks, it will likely pull back into the .382 level or more. Therefore, this strategy gives an entry range of $104.00-97.00.

Hold on though, what if MU is done pulling back and is going to straight to the moon you ask? Well, first dial that FOMO back a bit, but I get it in this market. Second, if that is your analysis, trading a break above the Friday candle, or even above the bearish earnings candle at an all-time high is the only move then. I will personally wait for a pullback, and if it moons, I will watch it with FOMO in my heart and a tear on my cheek.