Tech stocks have continued to lead this market higher and semiconductors have been a big part of the reason for that move. The group, as tracked by the Semiconductor HOLDRs (NYSE:SMH) ETF, is trading near 52-week highs and is approaching the top of its recent range. SMH had been in a very long and wide consolidation from mid-2009 through late 2010 and had found good support on any dip into the mid $20s, and sellers near $30. It recently cleared this base and rallied to the $33 level. It has since been trading in a very tight range as it consolidates the breakout. SMH is currently pressing into the top of this tight range, threatening a breakout above $33.
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The pattern in SMH is pressing toward a resolution just as its largest component, Intel Corporation (Nasdaq:INTC), gets ready to release its earnings report on January 13. This report should set the tone for the semiconductors and would certainly act as a catalyst for SMH. In looking at INTC, it's interesting to note that it has not performed as well as the ETF. In fact, INTC may have been holding it back. INTC has been trying to grind out a bottom since its early 2010 reversal. The chart for INTC is showing a possible inverse head and shoulders pattern being built with a neckline near $22. A breakout above $22 would confirm this pattern as a bottom and likely lead to higher prices. If INTC were to report poor earnings or guidance, there's a chance it could drop back toward the bottom of its base in the high teens.
So if INTC is not the reason for the strong performance in SMH, then what stock is? Well, Texas Instruments (NYSE:TXN) is one component that has a nearly identical chart to SMH. TXN broke out of a solid base in late September and rallied sharply. It has been trading in a very tight range and has refused to give up much ground on any pullbacks. $34 is the clear level to watch moving forward as a break above this range would likely mean a continuation of the prior rally.
Another component that has been a great performer is Analog Devices (NYSE:ADI ). ADI also cleared a solid base in September and rallied over 25%. The long-term chart for both ADI and TXN shows a very healthy consolidation. With the clear breakout above these bases, the longer term trend is definitely strong and favoring a continuation move higher. The short-term chart is trading in a very tight consolidation and simply waiting for a catalyst. Traders should watch the $37 level on the downside as a break below this level could lead to further consolidation.
While exactly how market participants will react to Intel's upcoming earnings this week is unknown, the report could act as a catalyst for a breakout in the semiconductors. INTC is close to a significant level that would confirm a breakout, while the other semiconductors are trading in a tight range after a strong move. Of course, INTC could drop after earnings too, but traders should stay on top of this stock because if things go right, there's potential for a great trade here.
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At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.