Deep Dive PALM: Some Pullback in Near Term, But Overall Very Bullish
IMPORTANT UPDATE: Please check at the bottom of this post for an important update.
PALM seems to be the latest wall street darling. Its shares have been on a run lately, creating new 52-week highs almost every week. In this post, we will analyze PALM from a technical analysis point of view. Let us start by looking at the big picture first. Here is a 5-year daily chart of PALM
The 5-year chart above shows $14.50 to be a region of strong resistance. PALM shares were rejected at that levels in once in 2005 and 2006 and twice in 2007. It did manage to breach that resistance in 2006 at one point though. However, once it dipped below $14.5 in mid-2006, it has never managed to get above that price level. PALM made its first attempt this week to breach that level and was not successful. If the broader market moves up from this level, then we will expect PALM to make a run for the $19 mark. At this point, 30% of the float stock is short, which will only add fuel to any rally from this $14.5 region.
Similarly we can see that $10.25 and $8.25 are strong support levels with support going way back to early 2005. In the next several months, I do not seem PALM breach $8.25 support level unless something catastrophic (= Palm-pre sales not going as expected) happens. In the near term (over next few weeks, even if the market corrects), with all the hype surrounding Palm-Pre, I do not expect PALM shares to dip below $10.25 support level.
Let us now zoom in a bit. The chart below is 3month daily chart. In this chart we have added one more support-resistance level at $12 mark. After breaking up above the $10.25 mark in early May, the PALM shares bounced between $10.25 and $12 price range for almost a month. After the breakout above $12 mark in early June, $12 mark has served as a solid support.
In next week or so, $12 should act as a support and if that gets breached on a closing price basis, then $10.25 region should not be breached easily.
The other thing to notice in this chart is that the volume in PALM has gone up substantially even as the price has increased, which is a very very bullish sign. However, PALM is up against a long term resistance and it might keep bouncing between $14.5 and $12 for a while – this could be a very nice channel to trade in until a breakout happens in either direction. Based on this, I got into PALM puts on Friday June 19, 2009 when PALM was near $14.50 price level.
Let us look at what the near term oscillators are telling us on the daily chart of PALM
Both the stochastic and MACD are bullish putting in higher lows. The RSI is pointing upwards, which is again bullish. Another thing to notice in the RSI is that it has barely dipped below 50 mark in this 3 month period. All of these are very bullish signs. However, the stochastic put in a lower high and is pointing downwards. That combined with the fact that $14.50 is a long time resistance tell us that in near future, the upside for this stock is limited. Depending on where the broader market goes, it might correct down to $12 or may be even $10.25 level. But overall, this is one of the most bullish stocks out there from a technical perspective. If the market gives a $10 price, then it will be a very good go long price and I will be looking to load up on the September calls.
UPDATE Jun 19, 2009: PALM announces earnings on Thursday Jun 25, 2009. Earnings can have dramatic impact on where the price of this stock goes, especially in the near term.
It is interesting to note that the implied volatility of front month options is quite comparable to those of the August. I don’t know much about what to infer from this. What I do know is that if some stock is expected to move a lot on earnings, then this shows up in the implied volatility.
Also, this stock is shown as Easy to Borrow even when 30% of the float is short. Not sure what is going on here. If anybody can explain both of these facts (the Implied Volatility and/or Easy to Borrow), it is greatly appreciated.
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