Summary
- COHR has rallied 57% from its bottom and could set up a new strong uptrend, while it is now facing its most important overhead resistance.
- The relevant industry has been resilient during the last sell-off, and despite a moment of slowdown, could head for more strength.
- In this technical article, I discuss important price levels and metrics that investors could consider, to gain an edge over the stock’s likely price action.
- By considering multiple outcomes and setting up an adequate contingency plan, investors are less inclined to act driven by emotions, as this could come at a higher cost.
- Considering the likely positive outcome and by observing strict risk management, I confirm my buy rating for COHR.
Investment thesis
Coherent Corp. ( COHR ) stock has been sold off severely during the past year and is now hinting at a breakout from its downtrend, which would translate into significant upside potential. My former assumption of a retracement has been confirmed, and I now discuss two outcomes investors could consider in order to take part in a likely breakout, while strictly limiting their downside risk by setting an appropriate stop-loss. The observed situation, and the likelihood of significant profits based on my targets in case of a breakout, lead me to maintain my buy rating for COHR.
A quick look at the big picture
The US technology sector has recorded a strong rally during January and continues to outperform all other sectors in the economy. Although the strong expansion observed in Semiconductor manufacturers, consumer electronics, and computer hardware manufacturers, companies in the electronic components industry are still struggling to build consistent strength. While it is also important to note, the industry has been among the most resilient in the past 12 months, while the actual leading industries have been massively sold off and were significantly negatively extended.
The NASDAQ US Benchmark Electronic and Electronic Equipment Index (NQUSB502020) bottomed on July 14, 2022, and finally broke out from its downtrend at the beginning of November, after having failed its first attempt a few months earlier. The industry benchmark tested its support at the end of December, on significant relative strength when compared to the broader technology market, the Nasdaq Composite (IXIC), or more narrowly the Nasdaq-100 tracked by the Invesco QQQ ETF ( QQQ ), and has since continued in its steep ascension, while more recently hinting at a slowdown of its momentum.
Where are we now?
In my last article "Coherent: Long And Short-Term Opportunity", published on October 6, 2022, I underscored my view of seeing COHR slowing down in its downtrend and retracing by reducing its strong negative extension.
I expect the stock to continue to reduce its negative momentum and build up some relative strength, as the recent sell-off has been very intensive and quick...the stock could now form a short-term rebound where it could try to reach its nearest resistance levels.
Despite the stock having a final drop, shortly after it formed a base, by reducing its negative momentum and relative weakness, until bottoming on November 8, 2022, and quickly retraced its losses until reaching my previously estimated target range.
My estimations suggest that the most likely price targets, if the stock can overcome its closest trailing moving averages, are now situated at $41 and $44.
COHR could significantly reduce its negative extension, until reaching the EMA55 on its weekly chart, supported by both the EMA8 and the EMA21, reporting a strong momentum and increasingly significant accumulation days. Despite the recent rally, the stock is still in a downtrend, and it faces a do-or-die situation, which is as risky and unpredictable as much as it may offer a great opportunity.
What is coming next?
While I made my observations on COHR's weekly chart, it's now important to zoom in and confirm my assumptions on the daily chart, a time frame I will use to define the next tactical steps in my investment strategy.
Other than facing its EMA55 on its weekly chart, the stock also faces its EMA200 on its daily chart, a very strong combination of overhead resistance that explains why the stock halted in its rally and is hovering in the same price range in the last month. My observations led me to conclude that the longer the breakout attempt, the stronger the move once a stock achieves overcoming resistance. COHR's MACD is hinting at a possible upcoming positive momentum, while the stock would need a significant expansion in buy-side volume and resilient relative strength, before being able to consistently overcome both resistances.
Investors who are interested in the stock could begin building up a small position and further increase their exposure if the stock would overcome its breakout. It is important to note that very often a stock will fall back once it broke out, testing its support and confirming the breakout. That's usually a great opportunity to load up more shares, but only if the stock shows resilience in its price action, confirmed by the discussion indicators, and the volume is confirming the rebound, with decreasing sell-side volume while approaching the support, and significantly higher buy-side volume while rebounding.
My first target in case of a successful breakout is around $50 and in case of sustained strength, I estimate COHR extending until $58. While this is certainly an encouraging outcome, investors may focus more on managing the risk of seeing the stock dropping, as this could lead to an extended sideways movement or even to seeing the stock backtracking in its downtrend. Based on the actual situation, I would define my risk tolerance with a trailing stop-loss slightly under the EMA55 on the daily chart, and the furthest around $40. This would give COHR enough space to try its breakout attempts while limiting my downside risk in case of a failure.
The likely discussed outcomes lead to a risk/reward ratio of 2.7 and based on the observed situation while considering the discussed strict risk management, I continue to rate COHR as a buy position.
The bottom line
Technical analysis is not an absolute instrument, but a way to increase investors' success probabilities and a tool allowing them to be oriented in whatever security. One would not drive towards an unknown destination without consulting a map or using a GPS. I believe the same should be true when making investment decisions. I consider techniques based on the Elliott Wave Theory, as well as likely outcomes based on Fibonacci's principles, by confirming the likelihood of an outcome contingent on time-based probabilities. The purpose of my technical analysis is to confirm or reject an entry point in the stock, by observing its sector and industry, and most of all its price action. I then analyze the situation of that stock and calculate likely outcomes based on the mentioned theories.
The electronic components industry has been resilient during the last year's sell-off and is expanding in its uptrend, while more recently hinting at a slowdown. COHR is fighting to break out from its downtrend in a do-or-die situation, where the stock could set up for significant upside potential, or fail and fall back into its downtrend. While the situation is still uncertain, investors can limit their downside risk within the discussed price range, and scale into the stock if it confirms its breakout, leading me to confirm my buy rating for COHR.
For further details see:
Coherent: It Is Moment Of Truth (Technical Analysis)