Semiconductor HOLDRS Barely Holding On

09/19/05 12:30:37 PM

by Arthur Hill

A failed breakout and a waning on-balance volume point to lower prices for the semiconductor HOLDRS.

Security: SMH
Position: Sell

On the price chart (Figure 1), the semiconductor HOLDRS (SMH) peaked in early August with a harami surrounded by gaps. On August 2, the stock gapped up and formed a long white candlestick. A small black candlestick formed the next day, and this created the harami. On August 4, the stock gapped lower and formed a long black candlestick. This makes for three reversal signs: the harami, the failed gap higher, and the gap lower. The stock continued lower the next several days and then bounced at the end of August.

FIGURE 1: SMH. The semiconductor HOLDRS peaked in early August with a harami surrounded by gaps.

Graphic provided by: MetaStock.

Graphic provided by: Reuters Data.

The current bounce started impressively and then fizzled. The stock broke resistance at 37.15 with a long white candlestick--and that was it. Buying pressure suddenly ceased and the stock moved back below the resistance breakout. The advance looks like a rising flag, and a move below the lower trendline would be quite negative. In fact, I would be prepared to turn bearish on a move below the early September low at 36.5.

Despite the late August bounce, on-balance volume (OBV) shows continued selling pressure. The indicator peaked in July and has moved lower ever since. Even though the stock advanced from 36 to 37.7, OBV did not even bounce. Instead, it continued lower as selling pressure persisted. This is quite negative and confirmation from the price chart would complete this bearish setup.

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.

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Semiconductor HOLDRS Barely Holding On

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