Texas Instruments Stock Nears Historic Breakout

Texas Instruments Incorporated (TXN) stock could enter a historic breakout in the coming weeks, underpinned by falling inventories and a supportive world economic environment. Wednesday's post-market earnings release may yield the next step of this advance, with quarterly results likely to meet modest expectations. Consensus estimates now expect the company to post earnings per share (EPS) of $1.05 on fourth quarter revenues of $3.21 billion.

The chip giant sold off more than 9% in October after missing third quarter revenues and lowering fourth quarter guidance. Consensus estimates have drifted to the high end of expectations in the past three months, driven by the phase one trade deal and better-than-expected chip prices. Broad sector indices have exploded to new highs at the same time, generating a stiff tailwind for components at all capitalization levels.

Wall Street has been ignoring Texas Instruments stock in recent months, issuing few upgrades or downgrades despite broad sector strength. Committed buyers have picked up the slack during this period, generating a recovery wave that has now reached the July 2019 high near $130. More importantly, a two-year basing pattern on top of the historic April 2000 top looks nearly complete, setting the stage for a period of more consistent upside.

TXN Long-Term Chart (1991 – 2020)

A multi-year downtrend ended at a split-adjusted $1.41 in 1991, giving way to a powerful trend advance that unfolded in multiple waves into the 2000 high at $100.00. The stock got crushed with the broad tech universe when the internet bubble burst, dropping more than 85% into the October 2002 low at $12.10. A two-legged recovery topped out at the 2002 swing high in the $30s in 2004, yielding several failed tests, followed by a 2007 breakout.

The subsequent reversal failed the breakout, generating a volatile decline that found support within 30 cents of the 2002 low after the 2008 economic collapse. A bounce into 2013 completed a double bottom reversal, establishing the strongest uptrend so far this century. The stock posted exceptionally strong gains into the fourth quarter of 2017, completing a round trip into the 2000 high.

The rally stalled at $120 in January 2018, giving way to sideways action, followed by a fourth quarter decline that ended at a 14-month low in the upper $80s in December. The stock recouped 100% of those losses into April 2019 and broke out once again in July but has made little or no progress in the past six months, stuck in a rectangular range between $115 and $135. Given this positioning, a buy-the-news reaction this week might clear that range and finally confirm the breakout above multi-decade resistance.

The monthly stochastics oscillator entered a sell cycle from the overbought zone in September and is now crossing into a bull cycle. This type of mixed action often generates false signals, adding risk to long positions taken in reaction to the news. In addition, price action since 2017 has carved a rising wedge pattern, which has a relatively high correlation with failed breakouts. Even so, these red flags aren't sufficient to keep new investors on the sidelines.

TXN Short-Term Chart (2017 – 2020)

The on-balance volume (OBV) accumulation-distribution indicator topped out in June 2018, about six months after the price peak, entering a distribution phase that ended in October. Subsequent buying power reached the prior high in May 2019, but OBV has just whipsawed across the resistance line in the past nine months. This indicates a persistent standoff between bulls and bears, even though price has drifted up to range resistance.

Wedge resistance has lifted to $135, or about three points above Friday's closing print. This warns market players to avoid buying a breakout in reaction to this week's report until it clears this formidable barrier. More conservative players may also wish to wait until OBV mounts the red line, which would lift accumulation readings to all-time highs. Once those technical elements are in place, shareholders can look forward to a bull rush and more vertical rally trajectory.

The Bottom Line

Texas Instruments needs to clear a final resistance barrier at $135 to confirm a historic breakout that opens the door to outsized gains.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.