The PHLX Semiconductor Index (SOX) hit a bull market and 16-year high at $1100 on Tuesday, continuing chip dominance that’s underpinned the historic tech rally since November 2016. Strong results from Apple, Inc. (AAPL) supplier Analog Devices, Inc. (ADI) triggered the latest buying surge, but the rally has produced dozens of excellent performers, led by NVIDIA Inc.’s (NVDA) 500% moon shot since February 2016.

Broadcom Ltd. (AVGO) could add to the celebration with its June 1 confessional, highlighting a chip-heavy reporting week that should dictate sector direction into the third quarter. The 2016 hook-up between Avago Technologies and Broadcom has paid major dividends, creating the S&P 500’s second-largest chip stock, behind Intel Corp. (INTC). Also, the proposed Brocade Communications Systems, Inc. (BRCD) acquisition just mounted a major European Union (EU) hurdle and looks ready to lift the company’s market capitalization above $100-billion.

ADI Monthly Chart (2000–2017)

Analog Devices hit an all-time high at $103 in September 2000 and entered a steep downtrend that found support at $18 in 2002, ahead of a bounce that posted a lower 2003 high at $52.37. A second and more persistent down leg undercut the prior low in 2008, dropping the stock to a 10-year low in the mid-teens. It spent the next five years grinding higher, finally reaching resistance at the 2003 high in 2013.

A two-year consolidation yielded a powerful 2015 breakout, with the stock riding strong iPhone tailwinds. The uptick peaked in June 2015 in the upper-60s, giving way to a rounded correction that posted a secondary breakout in November 2016. The stock gained ground into March 2017, pulled back into May and rallied to a new high above $90 after this week’s strong earnings report.

A Fibonacci grid stretched across the 17-year trading range highlights the .786 retracement level (red line). This marks a major inflection point for two interrelated reasons. First, many uptrends end at this harmonic level, printing lower highs that precede more bearish price action while second, breakouts target 100% retracement levels or triple digits in this case. We’ll just have to wait and find out which of these opposing scenarios takes control in coming weeks.

AVGO Weekly Chart (2009–2017)

The precursor to Broadcom Ltd came public on the U.S. exchanges in 2009 through Singapore-domiciled Avago Technologies, opening in the upper teens and entering an immediate uptrend that stalled near $40 in 2011. That level marked resistance into a 2013 breakout that caught fire, lifting the stock at a healthy pace into the 2015 high at $150.50. It then rolled an orderly correction that carved the outline of an ascending triangle pattern, ahead of an April 2016 breakout that failed to generate momentum.

The stock ticked higher in a lazy pattern into year’s end and lifted into a more vertical trajectory in January 2017, rallying above $200 into the May 16 all-time high print at $241.29. It’s been consolidating near the rally high for the last two weeks in a holding pattern ahead of the upcoming earnings report. Not surprisingly, the technical backdrop remains extremely bullish into the news, with good results likely to attract healthy buying pressure.

The trendline generated by rising lows since 2015 raises a modest red flag because extending that line across the May 2015 high produces rising channel resistance just seven points above this week’s price action. That tells observant market players to watch for a reversal at or near that level following a buy-the-news reaction. Conversely, selling pressure in reaction to a weak report could gather momentum, with little support until the $190 to $200 price zone.

The Bottom Line

Chip stock indices and funds are trading at multi-decade highs, leading the broad market and technology sectors since the November election. Look for this beneficial trend to continue after this week’s key earnings confirm industry strength through strongly profitable results.

<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>

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