From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
Thanks to everyone who participated in last week’s mystery chart.
We asked whether the chart could make a decisive upside resolution out of its consolidation pattern, or if this level will continue to act as resistance and keep a cap on prices.
The responses were mixed, with many wanting to wait for more information. In many cases, people were looking for confirmation of a breakout.
The chart was a daily candlestick view of the iShares Semiconductor Index ETF $SOXX.
Not much has changed since we first posted the chart. In fact, price has yet to make a decisive move from this key level. Let’s dive in and see what’s happening and where it’s likely headed.
Here is an updated look at the chart, this time with the x and y-axes:
Semiconductors had been a secular leadership group coming into the year. It’s an area we’ve been leaning on for long opportunities for several years now. But what was once a steady uptrend has transitioned into a sideways holding pattern as semis have consolidated on both absolute and relative terms.
We now want to know whether this corrective phase is behind us and if semis are ready for another leg higher from here.
Let’s break down the recent action and see what it’s suggesting…
After almost 6-months of sideways chop, SOXX is making yet another attempt to resolve higher from its consolidation pattern. The prior all-time highs around 450 is the line in the sand for this index.
This sector was an outperformer leading into this period of trendless action for stocks, so it should come as no surprise for it to be one of the first areas to reclaim its highs and break out.
One of the most bullish characteristics about this chart is the resilience from momentum, measured by the daily RSI-14. Despite the corrective action throughout most of 2021, momentum never hit oversold conditions. Now we just need to see an overbought reading to confirm these new highs.
Let’s zoom out to illustrate the strength of the primary uptrend in semiconductors:
As we all know, uptrends are made by higher highs and higher lows. That is exactly what we’ve seen on a consistent basis over the past decade. We are now witnessing yet another base breakout within the context of this relentless primary uptrend.
We never want to bet against charts that look like this one. Instead, we should always treat them as innocent until proven otherwise. That’s our stance on semis right now.
When we combine the evidence, we think it’s clear this group is ready to reassert its leadership role and make another leg higher. But it’s not only semiconductors that are resolving upward from a major continuation pattern right now… We’re also seeing similar formations break higher in many of its peer groups within the tech sector.
Here’s a look at two other critical subsectors, Software $IGV and Internet $FDN:
Both are breaking higher from their consolidations — in the direction of the underlying trend. And both look nearly identical to semis, so we’re anticipating the same from SOXX in the coming days/weeks.
The bottom line is if these areas of the market remain above their prior highs, we could see the entire technology sector resume its dominance as well as its role as a secular leader. And we’re already seeing it happen. Large-cap tech $XLK is trading at all-time highs on an absolute basis. And it’s also a stone’s throw away from fresh highs relative to the S&P.
What does it all mean for the broader market?
First, let’s take a step back and remember the pertinence of semiconductors in the modern age economy. Semiconductors possess countless applications and are an essential component in just about everything these days. Put simply, they are the economic lubricant for global industry.
For this reason, semiconductors are not just a critical benchmark for the technology sector, but also a great barometer for the overall market. Here’s what we mean:
There is a very strong historical relationship between SOXX and the S&P 500.
We like to call this analysis “Modern Dow Theory” as it adjusts for the fact that the US has shifted to a more service-based economy in recent decades and is no longer the manufacturing powerhouse of the past.
The delivery of goods and services in today’s world is mainly done over the internet… and the only way to do that is by using semiconductors. They’re also in just about any automobile or anything else with an engine these days, so also play a role in the traditional delivery of goods and services. Bottom line… they are in everything!
Notice how these charts typically trend together over time with divergences often occurring at key turning points.
Right now, they are currently making new all-time highs together and confirming one another’s breakouts.
Relative strength is in the US, it’s in large caps, it’s in tech… and it’s about to be in semis if SOXX can hold above 450. We want to use these areas to express our bullish thesis on stocks as long as this is the case.
If the current environment has taught us anything, it’s that markets are dynamic and relationships like these are constantly changing… We’re always watching closely!
But as of today, these groups are all suggesting higher prices for the tech and growth trade for the foreseeable future.
Thanks for reading and please let us know if you have any questions!