Bigger Might Just be Better When it Comes to Bullish Breakouts
With Marvell Technology Group (MRVL) set to announce earnings on May 28, the bulls couldn’t wait to jump on the stock and drive shares nearly 6% higher on Wednesday. The company is a semiconductor manufacturer that is a 5G play who inked deals with Samsung and Nokia. This places the company in a solid position competitively ahead of the 5G rollout as Samsung is the largest cell phone producer in the world.
Analysts are currently projecting the current quarter earnings to decline but expect the current year to produce a 30.3% EPS increase year-over-year and 60.50% next year.
The price has struggled for a long time to break the resistance near $28. It has had three major tests in July and November 2019, January 2020 and in April 2020. As the price ran back up to the level again this week, it was met with little resistance and broke through on Wednesday on high volume.
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The formation of multiple highs at the same level and the lower low established in March produced a long-term bullish price pattern called an inverted head and shoulders. The multiple shoulders in the early part of the formation makes this a complex formation. Also, the prior uptrend makes this pattern a continuation pattern of the prior up trend.
The projected move is based on the width of the pattern added to the breakout level at $28. In this case, the $10 range added to $28 provides a target of $38 in the coming months.
Option traders may want to consider buying a 17 JUL 20 $27 call for around $3.20. If the stock reaches $38 by expiration, the option will be worth $11, which provides a gain of $7.80 or over 200% ROR. The option has a delta of 0.68, which means it’s a reasonable stock replacement strategy. Consider rolling the option to a higher strike price with a delta of 0.6 to 0.7 if the $27 strike delta reaches 0.85 or higher.