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Checking In on the Semis


Take a look at some technical analysis of a popular ETF for semiconductor stocks.

Less than a month ago, I wrote a market observation that focused on the small cap semiconductors in the Russell 2000 Index (INDEXRUSSELL:RUT). These equities are an area of interest because we would like to see the higher beta, small cap companies lead the broader S&P 500 Index (INDEXSP:.INX). The theory is that when small caps lead the large cap companies, it shows a transition into equities and a much "healthier" risk appetite. This, obviously, can have bullish implications.

With the technology sector getting crushed lately (thanks to Apple (NASDAQ:AAPL) dropping over 20% since hitting the$ 700 level), checking in on other technology companies is a good way to see if there is any underlying strength in a particular sector. This displays thorough analysis as it is easy to watch APPL drop tick-by-tick and believe that the rest of the tech companies, and anything highly correlated to it, is also struggling.

Putting the small caps aside, I want to focus on a popular ETF for semiconductor stocks: Merrill Lynch Semiconductors HOLDRS ETF
(NYSEARCA:SMH). The likes of Intel (NASDAQ:INTC), Broadcom (NASDAQ:BRCM), and Texas Instruments (NASDAQ:TXN) are the major holdings in this ETF. While the Nasdaq has had a big sell-off over the past few weeks, the semiconductors have remained somewhat strong. Below, the daily chart looks ugly as the price action has shown some wild swings. The semis are down so far this year, but lately, they have not taken nearly as big of a hit as the Nasdaq.

Click to enlarge

(chart courtesy of eSignal)

A chart for the SMH on a weekly timeframe is posted below. Note the technical pattern that has been drawn with the trendlines. Price action is showing a "coiling" that began early this year. SMH has been moving towards the apex of this triangle. Symmetrical triangles are a common pattern that technicians look for, and the idea is that price action will gradually approach the apex of the triangle and then break out to either side. Thus, they are neither bullish nor bearish. They are neutral patterns. A breakout to the upside could signal a reversal in many major tech stocks. Likewise, a break below the pattern could also be a bearish sign for many of the tech companies and semiconductors. Remember, this is a pattern that has been building up for nearly all of this year so a decided move in either direction is likely to be strong. Keep an eye on this longer-term chart and see if the pattern holds and, if so, which way the SMH is headed.

Click to enlarge

(chart courtesy of eSignal)

This article by Peter Bryans was originally published on Schaeffer's Investment Research.

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