Semiconductors has been one group providing market leadership throughout the past year's rally. The group bottomed out ahead of the general markets and has been leading the way through several turning points. The group as a whole is at a critical area, and what happens next will surely have important implications for the rest of the market.

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The group as represented by the Semiconductor HOLDRs (NYSE:SMH) ETF is close to testing an important level near $27. This level was key resistance late in 2009, until SMH finally breached it in December. This level then became support throughout December as SMH consolidated and ultimately rallied higher. Unfortunately for longs, SMH failed to sustain its breakout and lost this level a few weeks later. In the process of dropping, SMH also sliced through a rising trendline that was framing the uptrend and its 50-day moving average. SMH has held support near $24 on a few occasions, and that's the level to watch on the downside. A break below this level could complete a large topping pattern resembling a head-and-shoulders pattern.

Source: StockCharts.com

Intel Corporation (Nasdaq:INTC) is probably the most important semiconductor to watch because of its role as a leader in the sector. It kick-started one of the last group rallies on an earnings report and tends to be the stock many investors turn to for exposure to the group as a whole. INTC has been trading in a channel for several months with the low range in the $18 range and the high end near $21. With INTC trading near the dead center of the channel, it would be fair to classify the trend as neutral. A move beyond either side of the channel would likely lead the group in the direction of the break. (For more, check out Channeling: Charting A Path To Success.)

Source: StockCharts.com

Applied Materials, Inc. (Nasdaq:AMAT) is another stock in the sector that has been trading in a range. The top of the range has a couple of key levels to watch moving forward. First, the $14 level was a prior high that provided some support in early 2010 before ultimately failing that level after a short-lived breakout attempt. There is also a declining trendline that marks many of the prior rallies and appears to be a level to watch. It currently stands near $13.50 and the 50-day moving average. On the downside, AMAT has shown strong support near $11.50 and will be an area to watch if the markets remain weak. A move below this level would be negative and could lead to much lower prices.

Source: StockCharts.com

Microchip Technology Incorporated (Nasdaq:MCHP) is a semiconductor stock that has also been trading in a sideways range, although it has a more loosely defined base. It had a false breakdown in November, followed by a false breakout late in December. While the overall range has been wide, most of the trading has occurred in a small two-point window over the past several months. The $25 to $25.50 level has been an important level on the bottom of the range, and the $27 to $27.75 level has been an important inflection point on the upside. MCHP is currently testing this area; a move above it would serve as a warning of a possible test of the highs near $29.50. It would also place MCHP back above the 50-day moving average.

Source: StockCharts.com


Bottom Line

The semiconductors have fallen out of the limelight recently, but remain an important group to monitor. Currently, many of the semiconductors are trading in a range-bound environment, but are close to important inflection points. How they react to these levels will have implications for the tech sector in general, as well as the overall markets. Often, trading signals will appear in individual sectors much earlier than in the general indexes. This is just one group to watch for one of these signals to provide a clue as to the market's next directional trend. Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.

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