ANSWERS TO QUESTIONS ON SEMICONDUCTORS
WHAT ABOUT THE 50-DAY AVERAGE?... I received several questions about my piece on the short-term breakdown in the Semiconductor (SOX) Index yesterday. One asked if it wasn't too soon to abandon semiconductors since the SOX was still over its 50-day average. I totally agree. And I wasn't suggesting that at all. That's why I advised "reducing" one's exposure -- not to sell everything. I was referring specifically to those readers who might have taken a new long position (or added to an old one) on this week's upside penetration of the 200-day moving average (see red circle). That was because the reason for buying (moving over the 200-day line) no longer applied. From a longer-term perspective, I actually started recommending semiconductors on September 20 when it first rose over its 50-day line (see blue circle). My actual words were: "This week's strong action suggests that it's time to start doing a little buying in this group" (September 20, 2004). I've repeated that advice several times prior to this week. So far, I don't see any serious damage having been done to the long-term picture. If the SOX were to close decisively under the 50-day average, however, (and break its three-month up trendline near 410), the premise on which I based my earlier recommendations would also be called into question.
Chart 1
IS APPLIED MATERIALS STILL A BUY OR A HOLD... Another reader asked about Applied Materials. AMAT recently broke out to a five-month high, but wasn't able to get through its 200-day average. It's fallen back to the middle of its earlier basing pattern. While the action is disappointing, it isn't that bearish either. For one thing, volume has been relatively light on its recent pullback. For another, AMAT is still trading over its 50-day average and initial chart support along its late-November low. I wouldn't recommend new positions at this point. But I'd hold onto existing long positions -- as long as it stays over its 50-day line.
Chart 2
POINT & FIGURE BOX SIZE?... I had a couple of questions on the point & figure chart for the Semiconductor Holders (SMH). One had to do with why I chose a .25 box size for my p&f chart instead of a box size of 1.00. Chart 3 is the traditional 1.00 box size for the SMH. After having given a very good sell signal in March (red number 3), it has yet to give a buy signal. While 1.00 may be ok for very long term trend analysis, I don't think it's sensitive enough to capture the intermediate trend signals which are more useful for trading purposes. After a little experimentation, I chose the .25 box shown in Chart 3. I felt that it gave earlier entry signals without being too sensitive. The last series of buy signals began during September (red letter A) at 31.50. That initial position is still profitable. It's given three other buy signals since then -- one of which is still in the black. An initial sell signal was given yesterday at 32.25. Which brings us to a second question having to do with the seriousness of that sell signal.
Chart 3
Chart 4
WHAT ABOUT 32.00 SUPPORT?... As I suggested yesterday, the initial sell at 32.25 warranted "reducing" one's exposure. The SMH, however, is trying to stabilize at the next level of p&f support at 32.00 (see green x's which shows today's action). A fall to 31.75 would constitute a more serious sell signal since it would violate three o columns at the same time. It would also push the SMH under the 50-day moving average on its daily bar chart. That, in my opinion, would justify more selling. P&f charts are very flexible. Feel free to experiment with them to find the box size that best matches their level of sensitivity with your trading style.
