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.

IN PICTURES: 7 Tools Of The Trade

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.

Related Articles
  1. Mutual Funds & ETFs

    Comparing ETFs Vs. Mutual Funds For Tax Efficiency

    Explore a comparison of mutual funds and exchange-traded funds, or ETFs, and learn what makes ETFs a significantly more tax-efficient investment.
  2. Mutual Funds & ETFs

    ETF Analysis: Vanguard Small-Cap Value

    Find out about the Vanguard Small-Cap Value ETF, and explore detailed analysis of its characteristics, suitability, recommendations and historical statistics.
  3. Mutual Funds & ETFs

    ETF Analysis: Vanguard Intermediate-Term Corp Bd

    Learn about the Vanguard Intermediate-Term Corporate Bond ETF, and explore detailed analysis of the fund's characteristics, risks and historical statistics.
  4. Insurance

    Whole or Term Life Insurance: Which Is Better?

    Learn the difference between term life insurance and whole life insurance. Understand when it is beneficial to buy each type of life insurance.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares 10-20 Year Treasury Bond

    Learn about the iShares 1-20 Year Treasury Bond ETF and its holdings, and understand why investors may be better served to look at other bond funds.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Global Telecom

    Learn about the iShares Global Telecom exchange-traded fund, which invests in U.S. and foreign telecommunication companies with high dividend yields.
  7. Chart Advisor

    Gold Struggles to Climb Higher and May Fall Soon

    Traders will be watching the price of gold over the coming weeks. We'll take a look at how a couple major moving averages are suggesting that the next move could be lower.
  8. Technical Indicators

    Use Market Volume Data to Determine a Bottom

    Market bottoms often carve out classic volume patterns that let observant traders make fast and accurate calls.
  9. Mutual Funds & ETFs

    ETF Analysis: United States Brent Oil Fund

    Learn more about the United States Brent Oil exchange-traded fund, the characteristics of the fund and the suitability and recommendations of it.
  10. Mutual Funds & ETFs

    ETF Analysis: ProShares Ultra Bloomberg Crude Oil

    Find out more about the ProShares Ultra Bloomberg Crude Oil ETF, the characteristics of UCO and the suitability and recommendations of UCO for investors.
RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  3. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  4. Indicator

    Indicators are statistics used to measure current conditions ...
  5. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  2. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  3. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  4. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!