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Chips Dipping

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A series of sector downgrades is finally starting to take its toll on semiconductor stocks. The latest came from ABN-Amro, which lowered its sector weighting to underweight. They also expect the semiconductor market to decline by 31%, instead of the original estimate of a 28% drop.

Also hurting the semiconductor sector is news of 2,300 layoffs from AMD, or 15% of its workforce. Advanced Micro also announced they will be closing two fabrication plants. The company expects to save $125 million annually, but will take a charge of $80 to $100 million in the third quarter. AMD is down 74 cents, or $7.64.

Semiconductor Index 60-Minute Chart

The 2.24% drop in the Semiconductor Index (SOX) makes it one of the worst performing sectors of the day, but on a relative strength basis the SOX has been holding up better than the Nasdaq since August. If this is one of the stronger sectors, the SOX should be able to hold above the recent low at 363. Holding above 390 would be even better, giving the SOX a chance to complete a small head and shoulders bottom on the 60-minute chart. A break of the neckline would also correspond to the SOX breaking the 50-period moving average.

Intel Daily Chart

For the SOX to break its neckline, its components are going to have to take out some resistance. Last week Intel (INTC) plunged below support at $22.25. This week the INTC is trying to reclaim that level. Today's attempt looks like it's going to come up short since Intel is down 48 cents and trading on its low. Support looks like $18.96 if Intel continues to decline.

Altera Daily Chart

Altera (ALTR) is another stock that dipped below support last week, but is trying to climb back. Altera had managed to get back above the $20 level at one point today, but is now down $1.51 and trading on its low.

KLA-Tencor Daily Chart

KLA-Tencor (KLAC) has a slight advantage over Intel and Altera, since it managed to hold above support at $31.75. It might not testing resistance at $40 any time soon, but holding above support would help the SOX do likewise.

Jeffrey Canavan
Assistant Analyst

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