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Throw out your SOX?

December 14, 2006
tags: , ,

Of the major indexes, the Nasdaq shows the most obvious relative weakness in the past few weeks. Aside from its clearly lower high, it is the index closest to challenging the 30 day MA(from the Investools study set) as support. I prefer to look at the indexes with the 20, 50 and 200 day MA. I get the impression this is a fairly standard combination among the market watchers and big boys alike as it represents roughly a month of trading, a quarter, and somewhere under a year.
The Nasdaq is the only index that is already breaching the 20 day MA. It’s followed closely by the Russell 2000 small cap index testing its 20 MA, but the RUT looks much healthier pulling back from its all time high.
The Nasdaq’s ascent over the last 4 months is nothing short of remarkable, taking back the preceding losses almost quicker and steeper than the downdraft was, which is quite unusual. Stock usually fall fast and rise slowly. Anyway, it doesn’t surprise me that it needs to slow down a bit. But to call an end to the bullishness would be a bit premature, I think. It may well retrace some still into blurry but potential horizontal support in the 2,390s which would coincide with the 50 MA as support. But what strikes me is that the index looks to be forming a pennant, a continuation pattern. We are very close to its corner, though, so there’s not but a day or two before the pattern dissolves if it doesn’t properly breakout.
(Click image for a larger view)

That long intro leads me to the true subject of the post. If the Nasdaq is showing weakness and supposedly leads the SPX, we should be very curious about the SOX (semiconductor index) as the supposed leader of the Nasdaq.

The SOX didn’t rally quite as boldly as the other indexes. Will it catch up or will it break down and drag the others with it? I would have liked to see the 475 area hold as support, but it didn’t. The uptrend support line has also been breached. The index crossed above a descending 200 MA, so it seems reasonable that the 200 would act as a weight before turning support the index to the up side. It’s interesting the way the price action just about kissed the underside of the 200 MA on 10/16 before regrouping for the break above it. This now could well be the test of that line from the top side. We were also perched at yesterday’s close exactly on the 50 MA which has just crossed above the 200 MA, a bullish sign. So this convergence may well give us the support we need to bounce higher. If it does, here will be a good time to be looking at getting into Semiconductors.
Yesterday was a big, ugly, bearish candlestick, but using the SMH as a proxy, the volume wasn’t drastic. So I think there’s hope.

This finally leads me to our very own VSEA. Over the last month since the SOX broke above the 475 resistance area, VSEA has shown good relative strength to the rest of the semis. You can be sure that if the group does get its act together and moves back upward, the leaders that hung in the strongest during the last month will be the first to take off.

Looking at the chart on its by itself, we see on the 5 year that it has fought its way upward, breaking 5 year resistance at 35 in September before testing it as new support and moving up from there. Noteworthy, however, is the lack of volume increase on the bounce up from 35.

On the daily, the uptrend since July is clearly established with three touches to the line. 42 seems also pretty clear as resistance. The lower high on the MACD is slight, but still a consideration of some waning momentum. Using the daily closes, we still have a potential ascending triangle intact. A drop below 40 would clearly break our uptrend line and probably the 30 MA for a red arrow. 39 would be the other potential support from the latest low, but after that it’s back to 35.

The Fundamentals of the stock are very strong. The negatives, Financials – ROE and Sales numbers are a touch lower, but close to what we’re looking for. Estimates – Next year’s EPS growth is slightly below the group’s. 5 year growth of 21% is less than the 25 we shoot for, but still quite good. On the positive side, the P/E on current year shows that it is trade at a slight discount to the group.
602 Institutions own 95% of the shares outstanding , so they’re definitely going to move this thing either way.
One very noteworthy development is that the company has recently allocated more money toward the buying back of common stock. They bumped it up from $200 Million to $300 Million toward buybacks. They have only bought $140 million worth so far, so there’s plenty more to go. This is a good thing for stock holders because it will both decrease the supply of stock and provide an elevated level of buying over the coming months/years.

In conclusion, we could just ignore most of the above and buy on a convincing move above 42 and use that as our new expected support. If it breaks back below, we’re out. 😉
I would look for a target of around 49 using the 7 pt. move up from 35.

Other potential semiconductor stocks are LRCX testing support today (make or break-please bounce) at 51.45 and PSEM looking very strong with an almost convincing test of 12 as new support in a rally with some dramatic volume on big buying days.

So that’s what I’m thinking about the SOX.

Are these posts too long?

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