Semis Are Lagging

10/04/07 10:09:09 AM

by Arthur Hill

The Semiconductor Index did not participate in the September rally, and relative weakness is a bad omen as we head into October.

Security: $SOX
Position: Sell

The semiconductor stocks make up an important component of the NASDAQ and the technology sector. While the NASDAQ moved above its July high in September, the semiconductor index ($SOX) never broke out and is underperforming the NASDAQ. The index first failed at its August high in early September and established resistance around 510. The index rallied back above 500 over the last few weeks, but again failed at 510 resistance with a pullback over the last two days. See Figure 1.

FIGURE 1: $SOX, DAILY. The indicator window shows the price relative, which compares the performance of the index against the S&P 500.

Graphic provided by: TeleChart 2007.

The indicator window (red line) shows the price relative, which compares the performance of the index against the Standard & Poor's 500. The $SOX outperforms when the price relative rises and underperforms when the price relative declines. The price relative peaked in July and declined to new lows in early October. It is a clear downtrend and this confirms relative weakness versus the broader market. The price relative needs to break the first resistance level (black line) to start reversing this downtrend.

FIGURE 2: $SOX, DAILY. The index declined sharply in July–August and then consolidated over the last two to three months.

Graphic provided by: TeleChart 2007.

Turning back to the price chart (Figure 2), the index declined sharply in July-August and then consolidated over the last two to three months. A triangle evolved in September and I am also showing the Bollinger Bands. The bands contracted over the last few weeks, and this usually precedes a directional move. A move above 510 would break the upper band and the upper trendline of the triangle. This would be bullish and target a move toward the July high. Conversely, a break below the lower band and the lower trendline of the triangle would be bearish. This would signal a continuation of the July-August decline and weigh on the tech sector. With the index showing relative weakness, the odds favor a break to the downside.

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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