Tech Stocks To Stay Away From On This Weakness – Seeking Alpha

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Just two weeks ago I outlined a few tech stocks which were worthy of further consideration; they maintained technical strength while their fundamentals remained intact. The case to buy them was simple: strong companies with still promising growth outlooks caught in the storm of an overall market pullback. The conclusion was buying them on weakness would be prudent and serve as an opportunity.

Today – while keeping the same article structure as two weeks ago – I instead have a few stocks which, while appearing enticing and tempting for finding a spot in your portfolio, show this is not the time to buy them.

Teeing It Off – Seagate

The first of these is Seagate (STX). This is a stock I would love to have in my portfolio (and as a matter of fact did at one point until a limit order shoveled it right back out) for the long-term. The yield is enticing, the business for the most part a cash cow, but the future of the business does not seem stable or solid. Yes, hard drives will be a part of our lives for years to come but technology still moves rapidly and unfortunately Seagate isn’t putting enough capex toward diversifying into all the right (innovative) areas.

The other concerning point to me is the technical weakness the shares are moving on. Even if I saw management making more aggressive decisions and into the right buckets, now would not be the time to enter the stock. Let’s take a look at a few key points on the chart.

There’s a few things to evaluate so let’s take it one step at a time and focus on the blue circles first. The left blue circle is showing the crossover of the 20-day moving average falling below the 50-day moving average; this is a bearish signal. Then, the rightmost blue circle is showing the stock closing under the 200-day moving average. This is a further and more intense bullish signal.

Now, let’s evaluate what is being set up here. Notice the leftmost red circle out toward the middle area of the chart. This large circle is denoting the large gap the stock had back at the end of January at earnings time. Gaps are notorious for their ability to attract the stock toward it like a magnet once it reaches it in later trading. This large gap in the last two months has just started getting filled. Right now with Tuesday’s close, the gap is becoming further filled. I expect this gap to continue to fill itself until it reaches $36.38. This is at least another 8% downside.

Furthermore, with the stock closing below the 200-day average on heavy volume, a 20-day crossover into the 200-day already occurring with the 50-day crossover in the 200-day not far behind, all of these now act as a large bearish formation along with them all becoming resistance instead of support.

The only bright side to all of this is at some point when the stock recovers there is a large upward gap between $44.19 and $48.79 which likely fills. However, this will take a reversal in the chart to head back toward this. There is no reason to buy now waiting for this particular gap to fill. Wait until the stock can break back over the 200-day before buying. Don’t expect this, however, until the stock settles and reverses which could be in the low-to-mid $30s or even the high $20s. Don’t also lose sight of the business aspect and the fundamentals either. By that time the story may be different, for better or for worse.

Ambarella

The next stock better off waiting on just a little longer is Ambarella (AMBA). I had been bullish on AMBA in the past and liked its great management team which has executed well and kept a great balance sheet – full of cash and no debt. Recently, however, GoPro (GPRO) has moved toward not relying as heavily on Ambarella’s great performing camera chips. This caused AMBA to drop on the news during their conference call back in December of last year. Ever since this time, the stock has not had any fight to stay afloat.

While the team at Ambarella is capable of continuing its diversification toward other non-wearable areas, it’ll be a longer road than most had hoped. Drones have not helped near as much as management nor industry experts first expected.

On top of this, the chart for the stock is not looking pretty but there is some hope.

First, let’s talk about the red circle where the 50-day moving average has crossed down below the 200-day moving average. Ever since occurring in February the stock has struggled to make any kind of meaningful headway above $66. In fact, if you look at December’s high $65.78 it actually almost reached the same top in May. This is a double top and is not indicative of anything except future resistance.

On the flip side, the stock formed a bottom in January at $46.80. Today we’re seeing a very similar bottom forming but still a little more downside to go until this is really tested. If this holds it would create a double bottom and act as a support and floor for the stock going forward. It then would need some kind of business catalyst in the form of better than expected earnings and guidance or a business move such as an accretive acquisition to reverse the trend.

The stock looks to be in better shape than the potential free fall of Seagate, so I would keep a closer eye on Ambarella in the near-term. You may have opportunity to begin a position within the next quarter. I suggest evaluating after the next earnings at the end of August as last earnings from less than a month ago is still settling in.

Yeah… AMD

Some may be surprised I am going to add Advanced Micro Devices (AMD) to this list but I am going to be fair and balanced. The company is clearly in the midst of a turnaround but the success of this turnaround is still to be determined. This means those looking to invest in AMD are going to have to tolerate not only a large amount of volatility but more risk as well. Therefore, this name requires more research on the fundamental and business end because there’s more to it than just bits and bytes. Not to mention, the industry is more complicated than hard drives (Seagate).

On a chart level the stock is forming more solid technicals, however.

There’s some new things to look which differentiate AMD from my prior two names. The first is the somewhat long-term bullish trend the stock has formed. The 20-day moving average has for the most part stayed above the 50-day while the 200-day is solidly below all of the other moving averages. However, the stock is in a critical time as the averages are converging together closer than they have in a year. In fact, shares had just tested the 200-day average early back in May. The shares rebounded and made it past the lower numbered moving averages with only minor resistance. But, this has also filled the previous gap-down circled in green formed at the beginning of May with its earnings release, so there’s no real attraction here.

In the bullish column is the pennant formation the shares are creating as noted by the two red lines. As this closes, the idea is the stock will break-out in the direction the original movement occurred – in this case up. In the meantime, shares could continue the sickening volatility and heavy volume before choosing a more definitive direction. On top of being a battleground stock, the fundamental story is still playing out with the jury still deliberating. There’s a lot of risk still involved until management can showcase with sales and earnings the company is ready to compete on a real level with chipmaker Intel (INTC) as well as other manufacturers such as Nvidia (NVDA).

It’s interesting how the story can be starkly different for two sets of tech names – ones which are beaten down and create buying opportunities and ones which breakdown and create traps. It’s important to know the difference both fundamentally regarding the business and earnings as well as technically as to where the stock is facing a downward trend against resistance or delighting in a rebound from support levels with an uptrend still fully in play.

If you’d like to be made aware of my opinion and analysis in the future on Seagate, Ambarella, AMD and other tech companies, then I encourage you to follow me by clicking the “Follow” link at the top of this page next to my name.

Disclosure: I am/we are long GPRO,INTC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.