Update and Trading Idea on STEC Inc (STEC)

On September 17th, with the stock’s uptrend under attack, we ran a piece about STEC. We discussed its power and market leadership. Given the market’s uptrend and the history of how market leaders behave we expressed the belief that it would form a buyable consolidation and urged taking a small position with a tight stop.

It is becoming increasingly likely that we were wrong.

We were encouraged this weekend when looking at the chart. Downside volume had slowed and the stock had closed tightly two weeks in a row, indicating the possible start of a bottom.

But today the stock exploded to fresh correction lows on huge volume. It traded as much as 45% off its high. O’Neil teaches that in a market uptrend a winning stock can correct as much as 2 ½ times the general market itself. With the market recently correcting all of about 6% lately we’d say 45% is a just a wee bit out of line.

But that doesn’t mean STEC cannot mount a powerful countertrend rally. We think one is brewing and are willing to take a stab at it as early as tomorrow.

After the bell Tuesday Intel (INTC) reported earnings that were well received by the market. At the least the semiconductor sector, which includes STEC, should react well in Wednesday’s trade.

Besides the INTC catalyst two things attract us fundamentally to STEC at this juncture. First, volume swelled today to the highest level since the breakdown began. That’s an indication of possible selling exhaustion and an invitation to longs to try their luck.

Second, the stock slammed into an area of trading congestion from June. This series of opens and closes in this general price area means there was a lot of activity at this price in the past and is likely to provide some level of support for the stock.

Given INTC’s report we expect STEC to gap up at the open. As long as the gap is not too severe we’d pursue it at the market with a stop under the day’s low. Should price open flat we’d first make sure Tuesday’s low is respected and then purchase over an early high. Should the stock gap below Tuesday’s close or trade below it from a flat open we’d ignore the setup and wait for a more compelling set up.

Should the trade trigger we believe it can trade back around the $30 area, into the trading congestion from September and the 20 MA. Our outside target would be the declining 50 MA.