Dow component Intel Corporation (INTC) reports earnings after Thursday's closing bell, with Wall Street analysts expecting earnings per share (EPS) of $0.90 on $15.7 billion in second quarter revenues. The chip giant's shares fell 9.0% in a single session after it lowered full-year guidance in April's first quarter release, and the stock dumped another 20% into late May. It has bounced in the past two months and has now stalled at the top of the post-earnings gap, which remains unfilled.

The PHLX Semiconductor Index (SOX) has ignored Intel's trouble in recent months, completing a three-month V-shaped pattern that posted an all-time high on Wednesday. Even so, the index looks vulnerable to a third quarter downturn that tests the first half's impressive 40% return, perhaps relinquishing between 200 and 300 points. As a result, it makes sense to keep a close eye on the SOX after market watchers digest earnings at the sector's biggest component.

INTC Long-Term Chart (2000 – 2019)

Chart showing the share price performance of Intel Corporation (INTC)
TradingView.com

A historic uptrend posted an all-time high at $75.69 when the internet bubble burst in 2000, yielding a massive decline that relinquished more than 80% of the stock's value into October 2002. A modest bounce stalled before reaching the .382 Fibonacci sell-off retracement level in 2003, marking the highest high ahead of a breakdown during the 2008 economic collapse. It found support less than one point under the 2002 low a few months later, ending the eight-year downtrend.

Mixed action completed a round trip into the 2003 high in the mid-$30s in 2015, ahead of a 2017 breakout that reversed in the mid-$50s in the second quarter of 2018. It tested resistance in April 2019 and turned sharply lower, filling out a 21-month rectangular range between that level and support in the low $40s. Accumulation has taken a hit this year, dropping to a two-year low before bouncing into the third quarter.

The monthly stochastics oscillator flipped into a sell cycle in April 2019 after the post-earnings sell-off and still hasn't reached the oversold level. This keeps bears in full control into this week's confessional, but the long-term trading range favors neither bulls nor bears. That will change with a breakout that tests the .786 Fibonacci retracement of the nine-year downtrend or a breakdown into the $30s that signals a major downtrend.

SOX Long-Term Chart (2000 – 2019)

Chart showing the share price performance of the PHLX Semiconductor Index (SOX)
TradingView.com

A multi-year uptrend topped out at 1,362 in March 2000, at the same time the bull market came to an end, giving way to a brutal decline that carried more than 84% into the October 2002 low at 109. A weak bounce stalled above 500 in the first quarter of 2004, yielding narrow range-bound action that broke horizontal support in 2008. The decline cut through the 2002 low during the economic collapse and kept on going, finding support 42 points below that level in November.

That ended the eight-year downtrend, ahead of a two-legged advance that completed a round trip into the 2004 peak in 2014. The index broke out immediately, but buying interest failed to develop, generating more than two years of testing on top of new support. It finally confirmed the breakout two months before the 2016 election, entering a historic advance that reached the 2000 high in January 2018. It has been testing that level for the past 18 months and could finally confirm a breakout with continued upside toward 1,700.

However, the monthly stochastics oscillator is flashing a bearish divergence, crossing into a sell cycle at the same time the index posted an all-time high. Taken together with straight up action since late May, the index looks ripe for a multi-week pullback that shakes out weak hands and initiates the next leg of a continuing test at 19-year-old resistance. Intel's report could offer a perfect opportunity for that reversal, telling complacent bulls to tighten stops just in case.

The Bottom Line

Chip stocks could face a moment of truth after Intel's earnings this week, completing a two-decade breakout or turning tail in another decline.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.