Watching Semiconductors As Our Leading Indicator

One of our more reliable leading indicators right now is Semiconductor Index. You're going to need chips in order to build anything tech related. And demand for chips and chip stocks is evidence to us of future demand for technology. So with the tech-heavy Nasdaq leading the S&P500 & Dow Industrials over the past decade, I think it's probably a good idea to keep a close eye on this space.

We can see in the chart below that last month the Philadelphia Semiconductor Index broke its downtrend from the March highs. After some backing and filling, we now have a fixed level of resistance that we can focus on. I'm talking about the 390 level where the $SOX peaked on June 20th and July 5th. This price is also where we find the 200-day moving average as well as resistance from a secondary trendline off the April highs:

From a momentum point of view, the road ahead is pretty clear. We begin with a bullish divergence in the Relative Strength Index as the price of the Semiconductor Index made lower lows going into June, while momentum had already turned higher putting in a higher low. Now we find ourselves at the important resistance level of 60 for RSI. Typically, we find that when markets are in a 'bearish mode' momentum tends to reach oversold conditions (as it did here) but struggles to get above the low 60s (as it has here so far). When this momentum oscillator powers into overbought conditions, we have evidence of buyers (not yet in this case).

So going forward, we know what to look for. The downtrend in the price of Semi's has been broken, but hasn't necessarily reversed. A Bullish Divergence in RSI tells us that a reversal could be imminent. And for confirmation of a new uptrend in the $SOX we want to see price break through that ever-so-important 390 level. Simultaneously, this should take RSI above those June/July peaks and into overbought territory, confirming a new bullish mode.

This series of higher highs and higher lows in price combined with bullish momentum readings is our best definition of an uptrend. And an uptrend in the Semiconductor Index means an uptrend in the Nasdaq, which tells us that stocks overall and risk-assets in general are probably going to do well.

Guys, I think the force is strong with this one.

Tags: $SOX $SMH $USD $SOXX $SPX $QQQ $DJIA