ALTERA AND XILINX PULL SOX LOWER -- SEMICONDUCTOR HOLDERS GIVE SHORT-TERM SELL
ALTERA AND XILINX FALL HARD ... Both chip stocks cut earnings forecasts and are falling heavily today on rising volume. Charts 1 and 2 show the chart damage being done. Both stocks have gapped beneath moving average lines and previous breakout points along thier September/October highs. With the trading day only half done, the big red volume bars show the heaviest trading in two months. There's no way to put a happy face on that. It's bad action. And it's pulling the SOX Index to a more than 3% loss.
Chart 1
Chart 2
SOX BREAKS INITIAL CHART SUPPORT... On Monday, I showed the Semiconductor (SOX) Index moving over its 200-day moving average and was starting to feel pretty optimistic at that point (December 06, 2004). Obviously, the action since then has been bad. First of all, the SOX closed back below its 200-day line on Wednesday which isn't a good sign. [A moving average should become a new support line once it's broken]. Today's selling is also pushing the SOX under initial chart support formed last week. For now at least, that negates the upside breakout that took place earlier in the week. The question now is how serious the damage will become. The SOX is testing its (blue) 50-day moving average. In addition, it's nearing an up trendline drawn under its September and October lows. The 410 level is a pretty significant support level. If it holds, today's setback will result in relatively minor damage. If it doesn't, the short-term chart for the SOX is going to look even weaker.
Chart 3
SEMICONDUCTOR HOLDERS GIVE SHORT-TERM SELL ... Earlier in the week I also showed the Semiconductor Holders (SMH) trying to get through their 200-day line and reach another breakout point at 35. They failed to do either. Today's drop has pushed the SMH below initial chart support and its 50-day line. It appears headed for a test of its three-month up trendline. Chart 5 is the same point & figure chart that I showed on Monday. I wrote at the time that "the SMH would have to drop to 32.25 to issue a sell signal". Unfortunately, the red boxes show the SMN doing just that. The fact that the last column of o's has fallen below a previous o column represents at least a short-term sell signal (or at least has given reason enough to reduce one's holdings). The p&f chart, however, also shows more support near 32. A drop to 31.75 would issue a second sell signal on that chart.
Chart 4
Chart 5
INTEL FALLS BELOW PRICE GAP ... I also showed the price gap formed on the Intel daily chart by Friday's upward surge. I mentioned that prices should not fall beneath the bottom of that gap and suggested "that made 23.40 a very significant support level for Intel". Prices closed below that level yesterday which was another short-term negative. Intel is now headed for a test of its 50-day average and its late November low at 22.35. That'll be another important test for the stock and the chip group.
Chart 6
THE ONLY THING WORSE THAN BEING WRONG IS STAYING WRONG ... There's an old Wall Street saying that "the only thing worse than being wrong is staying wrong". One of the many benefits of charts is that they tell us pretty quickly when we've made a mistake. It looks like I made one with the SOX. For those who bought into this group on my writing, I'd suggest reducing your exposure. I'd use minor bounces over the next couple of days to do a little selling.
