From a more structural perspective Semiconductors have been a space
we’ve wanted to stay away from for most of the year. Every time the
sector index made new highs, it quickly failed. This along with
consistent bearish momentum divergences on multiple time frames over the
past year have kept us in the cautious camp and we’ve preferred to look
elsewhere for long positions.
Looking at the PHLX Semiconductor Index, prices today are exactly
where they were a year ago. This is essentially a basket of chip makers
including the likes of Qualcomm, Texas Instruments, Intel, Broadcom,
etc. The first chart shows the weekly candlesticks coming down to former
resistance from last year (shaded in gray) that also served as support
earlier this year. Notice how we are also right at this uptrend line
from where this rally first got going in the second half of 2012.
With momentum putting in lower highs over the past year while prices
rallied and then failed after each new high, we’ve been gun-shy on the
long side. Looking at it today, RSI has held near the 40 level without
getting oversold. That’s a good thing. If prices can hold onto this
support and can prove it can stay above this uptrend line, I think that
structurally this would be very positive.
Here is a closer look at the Semiconductor Index. Notice the bullish
momentum divergence as RSI put in a higher low while prices made new
lows over the past week:
The way I see it, there is a ton of potential here if prices can hang
on to these levels. We only want to be long semi’s if prices are above
this uptrend line. If prices cannot get/stay above it, then I do not see
any reason to be involved on the long side. The levels are very well
defined, which is what we want.
We can have potentially 75 points to the upside in this Index, but
again, we would only want to be long if we can get above and stay above
this uptrend line. If that doesn’t occur, then this is a moot point.
Either way, the level is clear and I believe it’s well worth watching.
