Sector reaches key level

06/04/19
  • Chip stocks have mostly held their ground in recent days
  • Semiconductor index touched notable technical zone last week
  • Chip companies have become pawns in US–China trade war

There’s simply no getting away from the US–China faceoff these days, and if you’re a tech-stock trader, that means you’re never far removed from semiconductor stocks, which have gotten pummeled in recent weeks as they’ve become the frontline troops in the trade war. Even if you’re not trading ‘em, you’re probably feeling the reverberations from the sector.

Yesterday afternoon, in fact, the PHLX Semiconductor Index (SOX) was down around -19% from its April 24 high. But this bearish tidbit leaves out the much more interesting part of the chip story. Yesterday also marked the third day the SOX had kept its head above the waterline of last Wednesday’s low around 1,287:

PHLX Semiconductor Index (SOX), 6/25/18–6/3/19. PHLX Semiconductor Index (SOX) price chart. Conspicuous technical level

Source: Power E*TRADE


Experienced technical traders would likely tell you that ain’t just any level the SOX pulled back to. It’s an area that has turned back various price swings, up and down, over the past 10 months. In short, the recent retracement dropped the chip barometer to:

1. the support level of its March pullback low, which occurred around…

2. the resistance level represented by the top of the October–December consolidation, which was in turn in the vicinity of…

3. the support of the bottom of the June–October consolidation.

For good measure, last Wednesday’s low was also in the neighborhood of the 61.8% Fibonacci retracement level of its December–April rally.

The chart is a reminder of a couple of important technical concepts—how former resistance can become future support, and vice–versa, and how any support or resistance level is, in practice, a general zone and not a specific price point.

When all is said and done, though, there’s no denying the SOX has done a lot of pivoting in this vicinity, and it’s likely that many traders have noticed. The level around the March low has been reaffirmed as support by the fact that the SOX (as of yesterday) paused/bounced after hitting it. It could break below the level today or tomorrow, but as yet, the levee has held back the bearish floodwaters.

That means traders may be positioning themselves for a bounce, while remembering that a breakdown below this zone would imply even more selling, and that the next time the level comes into play, it could be as resistance.

Advance Micro Devices (AMD), 11/27/18–6/3/19 and Intel (INTC), 11/9/17–6/3/19. Semiconductor stocks price chart. Two semis, two situations.

Source: Power E*TRADE


Traders looking beyond semiconductor ETFs should remember that individual chip stocks can present very different pictures, as illustrated by the charts (above) of two titans in the space, Advanced Micro Devices (AMD) and Intel (INTC). AMD (left) is still relatively near its 2019 highs, while the longer-term look at INTC (right) shows the stock has pulled back to a support zone that dates back to late 2017.

A final observation: All types of traders and investors may be keeping tabs on the chip sector as a potential “leading indicator” for the broad market. Because semiconductor companies are being used as leverage in the trade war, a rebound in chip names may be taken as a sign to some bulls that it’s time to dip a toe or two in other areas of the market pool, while a breakdown would confirm a bearish stance.

Market Mover Update: Another chipmaker, Cypress Semiconductor (CY), soared around 25% yesterday following news it was being purchased by Infineon Technologies (IFNNY) for close to $10 billion.1

And speaking of retracement levels, yesterday’s SPX decline brought the index to within 0.3% of its March pullback low, which is also a 38.2% retracement of its December–May rally (see “Looking for a bounce”).

June 10-year T-note futures (ZNM9) hit another contract high yesterday, topping out at 126.94, as the benchmark 10-year Treasury yield fell to a nearly two-year intraday low of 2.07%.

Today’s numbers (all times ET): Factory Orders (10 a.m.), Motor Vehicle Sales.

Today’s earnings include: Cracker Barrel (CBRL), Tiffany & Co (TIF), Guidewire Software (GWRE), Salesforce (CRM).

 

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1 Barron’s. Cypress Semiconductor Stock Is Soaring on Deal With Infineon. 6/4/19.

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