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Semis Lagging NASDAQ

09/08/05 07:59:20 AM
by Arthur Hill

While the NASDAQ surged and broke resistance over the last seven days, the semiconductor HOLDRS remains flat and is not keeping up.

Security:   SMH
Position:   Hold

First, let's look at NASDAQ (Figure 1). The index surged in July, corrected in August, and broke resistance with a seven-day advance. The pattern looks like a falling flag/wedge and the breakout at 2156 (red line) should be considered bullish as long as it holds. A move back below 2140 would erase Monday's gain and this would challenge the breakout.

FIGURE 1: NASDAQ. The index surged in July, corrected in August, and broke resistance with a seven-day advance.
Graphic provided by: MetaStock.
Graphic provided by: Reuters Data.
 
The semiconductor HOLDRS (SMH) surged in July, corrected in early August, and traded flat from August 15 (Figure 2). The stock held up quite well in the second half of August as NASDAQ continued lower and the semiconductor HOLDRS (SMH) held firm. This showed relative strength. However, when NASDAQ moved higher and broke resistance, SMH stayed flat and currently is underperforming NASDAQ (relative weakness). This amounts to a nonconfirmation and is negative for both NASDAQ and semiconductor HOLDRS (SMH).

FIGURE 2: SMH. The semiconductor HOLDRS surged in July and corrected in early August, holding up well in the second half of the month.
Graphic provided by: MetaStock.
Graphic provided by: Reuters Data.
 
Will NASDAQ drag SMH higher, or will SMH drag NASDAQ lower? The semiconductor group is vital to NASDAQ, and I think NASDAQ will follow the semiconductor HOLDRS. The price pattern over the last four to five weeks amounts to a flat consolidation with resistance at 37.15 and support at 36. A resistance break bodes well for both, while a support break bodes ill. Guessing the direction of the breakout is just that -- guesswork. Even though relative weakness over the last seven days argues for a downside support break, I will wait for the break.



Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

Title: Editor
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E-mail address: arthurh@tdtrader.com

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Date: 09/08/05Rank: 4Comment: 
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