Avoiding Waterfall Declines

There's an old saw on Wall Street that a stock takes the stairs up, but the elevator down. In my view, Synaptics (SYNA) provides a classic example:

Here's a stock that was a frequent visitor to my screens last year until its December breakdown. Looking back, the break of the trend channel on December 17th should have sent out plenty of red flags (and stops) as the trend channel was decisively broken. This is yet another example of why stops are so important right now in order to protect yourself against some major wipeouts.

Back in November, the company beat estimates by 13 cents a share on revenues that were up over 50% on a yearly basis. That sounds pretty go, no? However, guidance was only inline with estimates (one red flag) and there have been rampant rumors of aggressive pricing and new competition in the sector (another flag). SYNA develops and supplies custom-designed user interface products and solutions that enable people to interact with various mobile computing, communications, entertainment, and other electronic devices. Its touch-sensitive pads and other products are sold to PC and mobile phone manufacturers include AAPL. Many investors viewed SYNA last year as a cheap play on Apple's growth, but like most tech suppliers, this is a very competitive business and one that gets squeezed the first when economy turns down.

The company will report on Thursday, January 24th and we'll see if the price declines lead the fundamentals or whether this was simply a market overreaction and therefore huge buying opportunity. As far as I'm concerned, I've added SYNA to my list of broken stocks and, until they prove that they don't deserve to be there, I'm going to keep looking for better situations. In addition, it also tells me something about shares of AAPL which have also broken down this week.