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| Semiconductor
Index |
THE SEMICONDUCTORS MUST SOON PULL
THEIR $SOX UP
In recent Swing Trader newsletters I've
mentioned that I'm keeping a very sharp eye on the Semiconductor Index,
or $SOX. The reason for this is simple -- technology stocks frequently
lead the overall market, and tech stocks themselves are often led by the
$SOX. It is hard for me to imagine the overall bull market, which began
in March 2003, continuing in a healthy state unless the chip issues can
"pull their $SOX up."
The $SOX is a sector index created by the Philadelphia
Stock Exchange. It consists of eighteen stocks, fourteen of which are
chip manufacturers such as Intel (INTC) or National Semiconductor (NSM).
Meanwhile, the remaining four companies provide capital equipment to
these manufacturers and include Applied Materials (AMAT) and KLA-Tencor
(KLAC).
The $SOX reached a peak of over 1300 in the heady days
of the tech market bubble, which peaked in February 2000. From there it
fell to a low just above 200 in October 2002. (This is the point where I
have started the weekly chart below.) In January 2004 it then hit what
has so far been its recovery peak at 560. Although this recovery seems
impressive when seen from the perspective of the low near 200, it should
also be noted that the index has regained less than 1/3 of the total
points it lost in the previous two-year period.
On the chart below I have drawn a trendline that
connects the major bottoms of October 2002 and February 2003. That
trendline now intersects the chart at approximately 490. As it often
does, the 30-week moving average mirrors this trendline. It is now at
489 and rising. The $SOX index has held above this rising moving average
since April 2003. While a break below the trendline and moving average
would not mean the end of the bull market for the semiconductor stocks,
it would certainly be a bearish signal.
Worth noting also is the action of this sector index
compared to the S&P 500, which is an important proxy for the overall
market. Although the $SOX had trended up against the S&P since
February 2003, that pattern abruptly ended in January of this year. An
examination of the indicators shows that MACD is now on a sell signal,
as is stochastics. RSI has managed to hold the 50 level. Meanwhile, ADX
shows that the strength of the uptrend has weakened dramatically. The
conclusion that I draw from this analysis is that the $SOX cannot
deteriorate much further without sustaining important technical damage. If
it turns decisively south, then I don't expect the overall bull market
in stocks to be very long lived.
Below you'll find a daily chart of the $SOX. As you
can clearly see, the index is in a bearish descending triangle pattern.
Key support exists between 491 and 493 -- a first-line of defense before
the rising trendline and 30-week moving average would be tested. The
$SOX has fallen below its sideways moving 50-day moving average.
Meanwhile, the 30-day moving average is sloping down and is above the
price, a bearish configuration. MACD is slightly bearish to neutral,
stochastics has rolled over after a small rally, and ADX, while
whipsawing, is again on a sell signal. RSI has consistently hit
resistance at the important 50 level. The candlestick from Tuesday,
March 2nd was a shooting star. It shows resistance to rallies at both
the 30- and 50-day moving averages.
To return to technical health, the index
would need to penetrate the first downtrend line, which is at about 525,
and then rally above the second downtrend line as well. That would put
the $SOX back above its 30- and 50-day moving averages and should be
enough to turn MACD and ADX bullish. Should the index instead continue
lower, however, then a decisive break of the 490 level would obviously
be ominous. I will be monitoring the $SOX closely in our next several
newsletters and will keep you closely informed of its technical message.
The direction it takes should be very telling about the future health of
the current bull market.
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