STMicroelectronics (STM) is Flashing Both a Discount and a J-Hook Signal

While technical analysis is often regarded as an interpretive discipline and therefore subject to much criticism, there are a few indicators within the realm that provide a more rigorous or empirical framework. One such technical tool is the J-Pattern or J-Hook Pattern, among the many compelling Barchart Screeners. On Thursday, 17 securities flashed the J-Hook and arguably STMicroelectronics (STM) is the most compelling.

A semiconductor specialist, STMicroelectronics designs, develops, manufactures and markets a wide range of computer chip products. Notably, it serves diverse sectors, including automobiles, industrial, personal electronics and communications equipment. Among its core specialties are microcontrollers, analog chips, discrete power semiconductors and sensors. Thanks to its acumen, ST as its known plays an integral role in the Internet of Things.

To be fair, STM stock until very recently has been a poor market performer. Primarily, it appears that the negative catalysts centered on disappointing financial results. For example, fiscal year 2024 revenue came in at only $13.27 billion, down 23.2% from the prior year. Also, the company’s gross margin slipped to 39.3% last year, a steep fall from 47.9% in 2023. This stat line suggests increased production costs or pricing pressures.

However, as Barchart content partner MarketBeat mentioned last month, ST commands a diversified portfolio of compelling tech products. Further, the company is also a leader in the electric vehicle market with its silicon carbide (SiC) technology. Carrying a Moderate Buy assessment from Wall Street experts, investors have decided that there’s value to be had.

Over the past month, STM stock gained almost 10%. Subsequently, the upside triggered Barchart’s J-Hook screener. Essentially, the pattern is a sinusoidal trend which potentially foreshadows a robust breakout move. If so, STM could be looking at poking its head above $30 — a key psychological and technical milestone.

Strength Typically Begets More Strength in STM Stock

Technical analysis may have its place when assessing the viability of a publicly traded enterprise. However, when it comes to actual trading decisions, it’s tough to overlook the numbers. In the case of STM stock, the main advantage it carries is its upward bias.

Using data since January 2019, a purely stochastic or temporal view of STM’s price action reveals that a position entered at the beginning of the week has a 55% chance of rising by the end of it. Over a four-week period, this statistic slips only modestly to 53.3%. Generally, if you bet enough times on STM, chances are, you’ll win out more than you’ll lose.

However, it’s important to analyze data that’s relevant to the situation at hand. For example, STM stock is on pace to gain 17% this week. Whenever the security returns between 10% to 20% in a one-week period, the subsequent week’s long odds do slip to 50/50. However, over the next four weeks — which coincides with the options chain expiring March 21 — the long odds jump to nearly 67%.

True, we are talking about a much smaller dataset so there is a risk of distortion. Plus, historical trends are not guaranteed to repeat. Nevertheless, this strength-begetting-more-strength pattern has been witnessed over a period extending more than 320 weeks. Therefore, I have greater confidence in the J-Hook materializing in STM stock than compared to other J-Hook candidates.

As well, the fundamentals matter. While STM stock suffered due to underlying financial challenges, the enterprise itself remains powerfully relevant. With the continued EV rollout along with other tech innovations, demand for ST’s products should theoretically rise. This dynamic also lends credence to the bullish narrative.

STM Call Options Could be Underpriced

Assuming that the positive scenario plays out, STM stock four weeks following an extreme-greed event typically generates a median return of 10.49%. Based on the most recent closing price of $28.22, such a performance would put STM at $31.18 by the close of the March 21 session.

Interestingly, call options for this expiration date appear to be underpriced. I say that because of the expected move calculation, which involves multiplying three metrics: price, implied volatility and time decay adjustment (of the targeted options chain). Conducting this exercise reveals an upper price forecast of around $30.74. Also, Barchart has its own expected move calculator which is targeting an upper price of $30.22.

However, there’s a solid chance that STM stock may above $31. Therefore, an aggressive bull call spread — specifically the 30/31 call spread for the March 21 expiration date — could entice gamblers because of its 233% payout. Since STM could legitimately hit $31.18, the probabilistic risk may not be as high as market makers believe.

More conservative traders can elect the 29/30 bull call spread for the same expiration date. This trade requires about a 6.3% lift in STM stock for the max payout of 122% to be triggered.