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Looking for ADI to do some catching up

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Since the Semiconductor Index (SOX.X) 318.97 -5.27% failed its rally attempt at the trending lower 50-day simple MA, it has been a downhill slide for most semiconductor stocks as the broader sector action and weakness in Intel (NASDAQ:INTC) $17.29 -4.68% has weighed on the group.

I was going through OptionInvestor.com's play list to see what bearish put trades were profiled in the sector and saw shares of Analog Devices (NYSE:ADI) $25.75 -2.31% on the list. While the stock has held rather tough to the sector, I do think the SOX.X looks like it will test the psychological 300 level and under such a test, would expect shares of ADI to do some catching up on the downside.

One "reason" I think ADI has held in well, is that the stock's point and figure chart recently gave a bullish point and figure chart signal in the "bearish signal reversed" pattern and this has bears sitting some bids in the stock. However, should sector weakness continue, look for bids to dry up and the stock to fall. Key near-term level of support from retracement work is $25.27, but a break much below that level or $25 should have the stock trading a bear's target of $22.50.

Analog Devices Chart - Daily Interval

While the SOX.X dropped sharply from its 50-day MA, shares of ADI have held rather tough and trade just above retracement support at $25.27. One reason for this relative strength is that the recent "bearish signal reversed" pattern in the point and figure chart probably caught some bears short below the $25.00 and they're looking to cover some positions. I think the SOX.X might be able to trade the 300 level in the next week and might correlate with a decline in ADI to the $22.50 level. Decent lower risk bearish trade in the sector here, with a tight stop just above Friday's high of $27.30 or for more risk averse traders, yesterday's high of $26.65.

Jeff Bailey
Senior Market Technician
Option Investor


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