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TORONTO (GlobeinvestorGOLD) — The Philadelphia semiconductor index (SOX), a price-weighted index composed of 19 U.S. semiconductor (chip) companies involved in the design, distribution, manufacture, and sale of semiconductors is a closely watched index for chip stocks. In June, the Semiconductor Industry Association raised its 2005 chip sales forecast from flat to a gain of 6 per cent from 2004, which should result in 2005 sales totaling $226-billion (U.S.).
Typically the second-half of the year usually entertains large advances in technology stocks and it appears that the trend will continue this year as well. Investor should view any declines as buying opportunities as mid-quarter updates coming in early-to-mid September should renew confidence and spur stocks.
A technical review of the chart reveals that after falling to a low of about 350 in September 2004, the index turned on a dime and vaulted higher and currently registers at 463.23. In fact, the moving average convergence/divergence oscillator (MACD), a trend-deviation technical study that reveals buy or sell trend signals, had actually diverged positively in September 2004 by rising as the index fell, thus issuing a buy signal at that time. Since then, the index has continued to chart positive technical patterns as a double bottom occurred in the January -May period and two bullish flag patterns have also emerged subsequent to that, suggesting further advances lie ahead.
However, at time of writing, the index is once again in a short-term corrective mode. Support offered by the 41-day moving average (MA) at 462 is being tested and with the Bollinger bands having turned negative temporarily, it appears that support will be broken and the index is headed to about 450 before it finds significant support, which could be use as a buying opportunity.
The 450 level represents a previous support/resistance level and the point at which the uptrend line and lower Bollinger band supports should coincide. Once the correction is complete the index should resume its rally to continue to search out the 512 level, which represents the technical target measurement suggested by both the double bottom and the July-August flag formation.
To take advantage of the anticipated 10-per-cent potential increase in the SOX index over the next four months, investors might wish to consider investing in the Semiconductor Holders Trust (SMH), an exchange-traded fund comprised of 20 semiconductor and equipment stocks on a weighted average, with Intel, Texas Instruments, Applied Materials and Analog Devices among the more heavily weighted stocks.
Merrill Lynch created the ETF in cooperation with the American Stock Exchange on April 24, 2000. The SMH moves in lockstep with the SOX and investors wishing to participate in chip market fluctuations are able to do so through direct purchase or short sale of the SMH or by using options. You can only trade the SOX through options.
The ETF, like the index, has traced out bullish patterns and is also experiencing a short-term correction as it trades below its 41-day MA and uptrend line supports. Although the MACD is flattening out and appears to want to turn positive it is still on a sell signal and will only give a buy signal once the lines cross up over one another. The SMH currently at $36.29 could find some support from the lower Bollinger band at about $35.60, but a retest of its previous resistance offered at $34.75 cannot be ruled out. However once the correction is out of the way, the technical measurements of the double bottom and the most recent flag pattern suggest a target of $40 over the next four months.
Yola Edwards is a contributing writer and technical analyst for Bell Globemedia Interactive, providing options and technical analysis research on a variety of North American equities.