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Semiconductor's turn to test 50-day MA

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On December 12th, it was the Biotech's and the Biotech Index (BTK.X) that gave traders and investors a first look at an index approaching a rising 50-day moving average to see if bulls would stand by the group and offer support. Biotech bulls answered the call as the index bounced from $550 to $596 just yesterday.

Today it's the chip bulls turn to support their favorites at a rising 50-day moving average. For the "computer tech" bulls, they are holding their breath and looking for a bounce. With the semiconductor bullish percent still overbought at 72.9% this will be an interesting test indeed.

Semiconductor Index Chart -

It's the Semiconductor Index's (SOX.X) turn to see just how bullish bulls are on the group. Today's test is similar to that found last week in the biotechs, but with ONE VERY IMPORTANT DIFFERENCE! This test comes at the 50-day when an index is trading below its longer-term 200-day moving average. The technical in the SOX.X are weaker than that found in the biotech. Another BIG difference is that last night's reading from Dorsey/Wright and Associates has the Semiconductor Bullish Percent reading "overbought" at $72.93. Today's action will most likely have that indicator now turning to "bear alert" status.

Last week I turned "bearish" on shares of Broadcom Corporation (NASDAQ:BRCM) near $43 after the stock gave a bearish triangle pattern at that level. Since the stock is "classified" as a semiconductor, I felt the "overbought" nature of the semiconductor bullish percent, coupled with a bearish point/figure chart pattern could be traded short/put. So far, bears have the upper hand there.

Broadcom Chart - $1 box

With an "overbought" bullish percent in the semiconductor sector and a bearish triangle pattern unfolding at $43, shares of BRCM ranked high on a bearish trader's list. You get a feeling it took a couple of days for market makers to get their inventories flat or short, but the past two days have been good for the bear in Broadcom. In a past write-up, I also noted that shares of Broadcom had achieved its bullish price objective of $47.50 based on the column of X's off the bottom that generated the first buy signal (column from $19 to $28). Calculating the bullish price objective there needed to be done in two parts since the first three boxes are charted on a $0.50 box scale, and the remaining 8 boxes are in $1 box increments.

Advanced Micro Devices Chart - $0.50 and $1 box

Shares of Advanced Micro Devices (NYSE:AMD) recently exceeded a bullish vertical count of $17.50. Today's trade at $16 creates a sell signal. This action will take at least one stock away from the semiconductor bullish percent indicator. Isn't it interesting how we're finding some semiconductor stocks achieving bullish price objectives (may exceeding them by $1 or $2 on exuberant bulls) and then starting to get sell signals when the bullish percent indicator is "overbought" and has been advising caution for the past couple of weeks?

We point these things out, not to try and come across as bearish, but to help subscribers understand it is/was time to be locking in gains in the sector.

Can the Semiconductor Index hold above its 50-day moving average? I will be surprised if it does. We might get a bounce, but I think lower into the end of the month. Then when the bullish percent declines and risk is being removed, some good bullish trades will be had.

Jeff Bailey
Senior Market Technician
Option Investor

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