It’s been a big August for US Stocks and other risk assets. So not really a coincidence that it’s also been an extremely productive month for semiconductors. You see, we look to semi’s as a leading indicator for tech as well as an overall gauge for risk appetite. Back in early July we mentioned that Semi’s were dancing around these declining trendlines, but that since momentum had just turned positive, a breakout was imminent. Sure enough, the 390 level in the Philadelphia Semiconductor Index ($SOX) was taken out at the beginning of August and the stock market was off to the races.
Today we want to take a look at the Semiconductor ETF because there has been some serious polarity for all of 2012. In fact, these support/resistance levels can be seen all the way back to last June, but let’s stick with just this year for now. The key levels are around 32.50-33, but it’s really an even tighter range than that. Let’s remember Polarity = Former Support turns into Resistance, and former Resistance turns into Support. This is what they teach us in Technical Analysis Kindergarten.
And here it is in action:
As we can see in the chart, $SMH is now back above this important polarity zone. Any tests of this support (formerly resistance) should meet buyers accumulating shares. More importantly, the measured move that we achieve after the breakout takes us to around $35.50 (32.50-29.50 = 3 + 32.50). This level also represents the highs for the year where we should expect to find some supply.
This move of just a few bucks may not seem like a big deal at first glance. But the impact that a 6%+ move in semi’s from here would have on US Stocks and other risk assets is no joke. Higher beta individual names would do much better, but this also signals that the Nasdaq, even at 52-week highs, could have further room to run.
Not shown in the chart (but mentioned here), momentum in the Relative Strength Index turned positive in early June. This is what gave us a heads up that a breakout was probable. Price then confirmed it three weeks ago. Also, we have upward-sloping 50 and 200 day simple moving averages (not shown). This also tells us that we should continue to give the bulls the benefit of the doubt here.
The point of the post was to show how important this polarity has been, not just for Semiconductor stocks but also the impact that it has on everything else. If we include the positive momentum, rising smoothing mechanisms, and higher measured move targets, we should expect to see higher prices for semi’s in the near future.
Good stuff guys. Stay tuned….
Tags: $SMH $SOX $XSD $SOXX $USD $SOXS $QQQ