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zeev, Back at home in Philadelphia
Commentary: Semiconductor index moves back into lead

By David Nassar
Last Update: 12:01 AM ET March 9, 2005
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BOULDER, Colo. (MarketWatch) -- The semiconductors, as represented by the Philadelphia Semiconductor Index have been a friend to bull market rallies since their inception -- truly no other index has offered greater cause for optimism on Wall Street and beyond.



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During the recent rally from the mid-January lows near 383 to the highs made two weeks ago near 449, the semi's (SOX: news, chart, profile) have been somewhat "off the radar" as a market leader -- until now. The group is shaking the cage doors and it now appears the stocks are ready to run.

Many analysts believe the recent strength of KLA-Tencor Corp. (KLAC: news, chart, profile) , Intel (INTC: news, chart, profile) , National Semiconductor (NSM: news, chart, profile) , and Texas Instruments (TXN: news, chart, profile) , have all run into an area of resistance. Don't believe it! The only kind of resistance we see in the near term future for these leaders is of the "minor pullback" variety, which would likely be the result of short-term profit taking. Institutions love the semi's because they have rewarded their participation so handsomely in past rallies, and they won't leave them behind in this bull market either, even as they lag the broad market. Therefore, minor pullbacks are the kind of weakness we like to enter positions on, not exit.

Other shares lagging with strong propensity to follow suit would include Xilinx (XLNX: news, chart, profile) , Novellus Systems (NVLS: news, chart, profile) , Integrated Device Technology (IDTI: news, chart, profile) , and Broadcom Corp. (BRCM: news, chart, profile) . Regardless of whether the semi's are traded as a group (SMH: news, chart, profile) , or as individual shares, the opportunity for the bulls to carry the message of the semi's is upon us.

Geopolitical concerns aside, rising gas prices and a weaker dollar, the market has legs and it wants to run. With the semi's now entering a level of support relative to the breakdown in 2004, we may see minor weakness from the daily maelstrom of negative news, but the bigger picture points to a rising tide with the semi's ready to lead the way. Conviction to stay with the current trend will prove prudent, while looking at short-term resistance as only minor barriers.



The important beacons to focus on are key levels of support, which must hold in order for this rally to accelerate. Expect "support one" (S1) at 434, with S2 set at 443, and S3 at 447.

Yes, for those of you that see these as the current 50-, 20- and 10-day moving averages, you are dead on. These levels are also thought of as objective pieces of data that confirm the trend. As prices converge on and diverge from these averages, it is easy to lose conviction and give way to what seems like discipline. But when discipline is disguised as whipsaw, it is because perspective of the trend is lost.

In this regard, we must focus on the moving averages as setting trend, not daily price fluctuation. While price fluctuations will offer us entry signals on weakness, it is the moving averages that will provide true support for this rally to continue.

Other levels to focus on are the 454 level, which is where the bears stepped in last and halted the current rally. Clearly sellers live on this floor, but does that mean the elevator stop there? No! It only means that this level will likely be tested numerous times before the 454 level is cleared. As demand (from buyers) absorbs supply (from sellers), the 454 level will weaken and start clearing the way to new yearly highs.



But before we realize this and the semi's catch up to the broad market (Dow (INDU: news, chart, profile) and S&P (SPX: news, chart, profile) ), the following levels will also need cleared. They include: 460 (R1) 518 (R2), and 560 (R3) these are the three key highs from the last downtrend.

These levels are clearly seen by viewing the prior downtrend, defined as lower lows and lower highs. As we clear R1 through R3, we can expect higher highs and higher lows, as long as the higher lows exist above the prior levels of resistance -- defined as R1 through R3.

As this develops, the prior levels of resistance will then become support, giving the trader logical places to set stops, should the market pull back too deeply. As we trace the steps of the new uptrend, we must remember, as stated above, the moving averages will act as ultimate support along the way.

Other observations important to consider is the momentum of the current trend. As we can see from the angle of attack from the last downtrend (beginning 1/04 and accelerating on fear in 7/04, the fear subsided in 9/04, putting in a bottom and triggering the new uptrend. As the semiconductors have shown us in 2004 and many times in the past, fearful selling often extinguishes the trend. As such, we can expect fear's alter ego -- greed to also show up before the current bullish trend is in jeopardy. Just as the downtrend in 2004 matured, and fearful selling accelerated in July, 2004, we can also anticipate greed to present itself as the current rally matures.

Hesitating leaves most participants behind in either trend, under the foolish guise that they missed the top or bottom, but as history has proven, it is simply not necessary to pick bottoms and tops to benefit from a spectacular move -- a move that I believe is ahead us for the semi's and the current bull market. Shying away from the semiconductors under the belief that the bottom was put in September, 2004 is as ridiculous as not selling the semi's in July, 2004.

http://www.marketwatch.com/news/story.asp?guid=%7B2763360C%2D4755%2D45F1%2D871D%2DBD928255B940%7D&am...