Chips and dips

While the recent sell-off in semiconductor stocks has ramped up discussion about the nuances of AI hyperscaler spending levels, ongoing “demand for compute,” and the resulting memory crunch, the price action in the chip space may be communicating something simpler, and more immediate.

At Tuesday’s low, the PHLX Semiconductor index (SOX) was down more than 18% from its June 22 record close—its biggest 10-day down move since [date]. The fact that it bounced solidly off its intraday low and followed through more than 2% to the upside on Wednesday—despite broad-market weakness—was probably seen by some traders as a “natural” development, given the level it had fallen to:

From a chartist’s perspective, the chip index appeared to be following a fairly common “technical” script: bouncing off a support level defined by a prior (June) low, which in turn represented a successful test of the previous breakout above its May highs.

There’s nothing mystical or mysterious about support and resistance. They are simply levels that become apparent after traders repeatedly buy or sell at an approximate price level, at least temporarily turning back a rally or, as in this case, interrupting a downturn. For example, we know that buyers were enthusiastic about buying chip stocks when the SOX pulled back to roughly 12,000 in June because the index rallied nearly 20% over the next several days.

Of course, an index like the SOX represents the composite performance of many individual stocks, including Micron (MU), which was a central player in the chip volatility during the final full week of June:

The stock’s price action in recent months closely resembles that of the SOX, which is understandable, since it is one of the index’s most heavily weighted components. But thinking in terms of an individual stock rather than an index may better explain some of the potential real-world significance of support and resistance levels, especially in terms of short-term price action.

Since a rally off support is de facto evidence that buyers have entered the market, it stands to reason that some of those traders and investors may have chosen to enter stop-loss orders somewhere below the level. The logic is that a significant move below support negates the bullish premise that triggered the long trades in the first place. As a result, a breakdown below the support level can trigger these stop-loss orders, accelerating the sell-off and potentially encouraging other traders to abandon their long positions, or go short.

The tests of support represented in the SOX and MU charts may have greater significance given larger market dynamics that may be at play. For example, in noting the market’s pattern of rotating from one type of AI beneficiary to the next over the past couple of years, Morgan Stanley & Co. strategists expect the recent shift away from semiconductors to continue—and to include a possible push back into the AI hyperscalers that have languished in recent months.¹

While markets never “ring bells” when they’re about to make significant moves, staying abreast of a stock or a sector’s key price levels may, sometimes, help traders and investors to identify potential pivots in advance.

Today’s numbers include (all times ET): jobless claims (8:30 a.m.), Existing Home Sales (10 a.m.), EIA Natural Gas Report (10:30 a.m.).

Today’s earnings include: PepsiCo (PEP), WD-40 (WDFC).

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¹ MorganStanley.com. Weekly Warm-up: The Broadening Gains Steam as Semis Lose Momentum. 7/6/26.