Do We Buy Semi's For A Trade?

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.

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