INTEL PUSHES SOX OVER 200-DAY AVERAGE -- MAJOR HEAD AND SHOULDER BOTTOMS? P&F CHART OF SEMICONDUCTOR HOLDERS

INTEL TRYING TO HOLD GAP AREA... I'm going to take a close look at Intel because of its importance in the Semiconductor (SOX) Index and the Nasdaq market (not to mention the Dow and the S&P 500). A bullish report last Thursday caused Intel to gap higher on very strong volume the next day. It had just recently bounced off its 50-day line. Although the stock closed near its low on Friday, it's gaining ground again today. That's encouraging because of the underlying gap left on Friday (see box). In chart work, upside gaps are usually bullish -- especially if they take place on heavy volume. It's normal for a stock to "fill" a portion (or sometimes all) of the underlying gap. It shouldn't, however, fall below the bottom of the gap area. If it does, the upward move becomes suspect. The gap encompasses the distance between 23.90 (Friday's low) and 23.40 (Thursday's high). That makes 23.40 a very important support level. Chart 1 also shows that Intel still needs to rise above its November peak (at 25.00) and its 200-day average to turn its trend convincingly higher. Chart 2 shows another reason why $25 is an important resistance barrier. That's because it also represents the early August high. Chart 2 has the look of a potential "head and shoulders" bottom with the neckline at 25. That would make the recent setback the "right shoulder" which is usually followed by an upside breakout. That's not the only "head and shoulders" pattern for Intel.

Chart 1

Chart 2

LONG-TERM VIEW IS BULLISH ... The monthly chart of Intel also has the look of a major "head and shoulders" bottom. [A H&S bottom has three troughs with the middle one (the "head") lower than the two "shoulders"]. That qualifies the 2004 decline from 34 to 20 as a potential right shoulder. Notice also that the bottom of the two shoulders (LS and RS) occurred near 20, which is a normal part of that pattern. The 2004 right shoulder also retraced two-thirds of the 2003 advance which is also normal. Which brings us to the two trendlines shown in Chart 3. The steeper down trendline to the right defines the 2004 price decline. Last week's upturn appears to have broken that first resistance line. Assuming Intel can get through initial resistance at $25 (from Chart 2), that would make possible an eventual rise to the neckline drawn over the 2002-2004 highs in the 34-35 region. A close over that barrier would be even more bullish. The main value of long-term charts is that they put trends in much better perspective. If this is indeed a head and shoulders bottom in the making, that bodes especially well for the semiconductor group.

Chart 3

THREE LOOKS AT THE SOX ... Friday's strong Intel action pushed the Semiconductor (SOX) Index to its first Friday close over its 200-day average in six months. And, so far at least, it's staying over it (which is also very important). Chart 5 shows that the SOX has also broken its 2004 down trendline. In fact, it bounced off of it during its last minor setback. It's a good sign when a former resistance line starts acting as a new support line. The monthly bars in Chart 6 put the three trends together. And, not surprisingly, the SOX also looks like a potential head and shoulders bottom in the making. Its neckline is steeper than Intel's, but it's not unusual to have a down-sloping neckline. As in the case of Intel, the two shoulders (in 2001 and 2004) both bottomed at 350. With the 2004 down trendline having been broken, the next "major" upside target is a test of the neckline. That appears to make semiconductors one of the best values in the market.

Chart 4

Chart 5

Chart 6

POINT & FIGURE LOOK AT SEMICONDUCTOR HOLDERS... Chart 7 is a .25 box point & figure chart of the SMH. It shows a series of four buy signals since October (that's when a column of x's exceeds a previous x column). The green x shows prices rising today and nearing another "buy" at 35. The SMH would have to drop to 32.25 to give a sell signal. The red and blue lines are trendlines. On p&f charts, trendlines are drawn at 45 degree angles. The red down trendline has been broken. The blue support line is still intact. Chart 8 shows the bar chart version of the Semiconductor Holders. It shows the SMH challenging its 200-day average. That means that a p&f buy signal at 35 would coincide with the breaking of the long-term moving average. That's a good combination.

Chart 7

Chart 8