Semiconductor equipment and materials power much of the modern world and the conveniences that many rely on for day-to-day work and entertainment. Active traders will likely look to profit from the strong underlying demand for products from this sector by gaining exposure through exchange-traded products and leading companies in the sector. In this article, we take a closer look at the charts from across the semiconductor sector and try to pinpoint how many traders will be looking to trade the strong macro theme heading into the final months of 2020.

Key Takeaways

  • The SPDR S&P Semiconductor ETF (XSD) recently bounced off of an influential level of support and looks well positioned to head higher.
  • Top holdings of XSD such as SunPower Corporation (SPWR) and Universal Display Corporation (OLED) have broken above resistance and look to be headed higher.

SPDR S&P Semiconductor ETF (XSD)

For many traders, one of the best ways to gain exposure to semiconductors is through the purchase of exchange-traded products such as the SPDR Semiconductor ETF. Looking at the chart below, you will notice that the price has strongly rebounded from the March selloff and has triggered a bullish crossover between the 50-day and 200-day moving averages. This bullish crossover is utilized by many followers of technical analysis to mark the early stages of a major uptrend.

The recent retracement and bounce off of the support of the horizontal trendline near $115 will likely be used as confirmation that the bulls are in control of the momentum and that prices are likely headed higher. From a risk-management perspective, stop-loss orders will most likely be set below the dotted trendline or the 200-day moving average, depending on outlook and risk tolerance.

Chart showing the share price performance of the SPDR S&P Semiconductor ETF (XSD)
StockCharts.com

Aside from investing in individual companies, there are several ways to monitor the investment performance of the overall semiconductor sector. These include the benchmark PHLX Semiconductor Index, known as the SOX, as well as its derivative forms in exchange-traded funds. There are also indices that break the sector down to chip makers and chip equipment makers. The latter segment develops and sells machinery and other products used to design and test semiconductors.

SunPower Corporation (SPWR)

As one of the top holdings of the XSD ETF, SunPower will likely be of specific interest to active traders because the dotted trendlines clearly illustrate the plans of the bulls and where to place buy and stop orders. The recent break beyond $12 was the latest move that triggered a flood of buy-stop orders, and based on the charts, it is clear that there is little resistance standing in the way of a move higher.

Again, the bullish crossover between the long-term moving averages will likely be used to confirm that that long-term trend is headed higher, and many will likely use short-term pullbacks such as the recent move toward the 50-day moving average as buying opportunities. Stop-loss orders will most likely be placed below one of the levels of support, depending on outlook and risk tolerance.

Chart showing the share price performance of SunPower Corporation (SPWR)
StockCharts.com

Universal Display Corporation (OLED)

Another top holding of the XSD and a definite candidate for active traders is Universal Display. Looking at the chart below, you can see that the price of the stock has recently bounced off the support of the 200-day moving average and is well positioned to make a move higher. Followers of technical analysis will most likely note the recent crossover between the 50-day and 200-day moving averages and use it as confirmation of likely prolonged move higher.

Buy orders will most likely be placed as close to current levels as possible, and stop orders will undoubtedly be placed just below $163.83 in case of a sudden shift in fundamentals or market sentiment. Traders will also want to make note of the recent bullish crossover between the moving average convergence divergence (MACD) and its signal line because it too is a common buy sign that points to a surge in momentum.

Chart showing the share price performance of Universal Display Corporation (OLED)
StockCharts.com

The Bottom Line

Semiconductor materials and equipment are key to modern-day necessities and will likely continue to experience strong underlying demand. Based on the charts discussed above, it appears as though the sector is well positioned to finish off 2020 with a strong move higher, with well-defined levels of support to guide the placement of buy and sell orders.

At the time of writing, Casey Murphy did not a position in any of the assets mentioned.