SEMICONDUCTORS RESUME UPTREND -- APPLIED MATERIALS BREAKS OUT -- ASIAN ETFS BENEFIT FROM CHIP GAINS -- TAIWAN SEMICONDUCTOR NEARS BULLISH BREAKOUT

SEMIS CONTINUE TO CLIMB ... The Semiconductor (SOX) Index is gaining more than 2% today to continue its uptrend and its recent market leadership. Chart 1 shows the SOX reaching a new 52-week high today. Just last week it broke through its summer high to achieve a bullish breakout. It's relative strength ratio is also hitting a new 2005 high which portrays the new SOX leadership. Not surprisingly, the Semiconductor Holders (SMH) are the day's strongest sector ETF. It too completed a bullish breakout last week. What's especially encouraging is the fact that the old August peak near 38 (see circle) is now acting as a support level (green arrow). That's what's supposed to happen if the bullish breakout is for real. And this one appears to be. Applied Materials is also breaking out.

Chart 1

Chart 2

APPLIED MATERIALS BREAKS OUT ... Although a lot of attention is being given to some of the day's chip gainers like Altera, one of the best chart patterns belongs to Applied Materials. Chart 3 shows the stock having just cleared its summer highs near 18.50. The weekly bars in Chart 4 show that AMAT is trading over 19 for the first time since the middle of 2004. Its relative strength ratio (solid line) shows the same pattern. After peaking at the end of 2003, the RS line declined until this spring when it started to recover. The ratio is now on the verge of hitting a new 2005 high. That makes AMAT a potential leader in the chip group and the market. AMAT has a 13.75% weight in the Semiconductor Holders which makes it the third biggest stock in the ETF behind Intel and Texas Instruments.

Chart 3

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TAIWAN SEMICONDUCTOR BOOSTS ASIAN ETF ... The buying of semiconductor stocks may also account for some of the recent strength in Asian Exchange Traded Funds. Two of of the day's strongest are South Korea (EWY) and Taiwan (EWT). Semiconductors are the biggest part of the South Korean ETF (21%). The Taiwan ETF has an even bigger chip weight of 23%. The biggest stock holding in the latter is Taiwan Semiconductor (12%). That's one reason why that stock is worth paying attention to. The weekly bars in Chart 5 show TSM approaching 10 for the first time since the summer of 2003. The pattern of higher lows over the last three years (see rising trendline) increases the odds for a bullish breakout. That could give a big boost to Asian markets with a heavy chip weighting and Taiwan in particular. The weekly chart of Taiwan IShares (Chart 6) shows a triangular formation which favors an eventual move to the upside. A close over the top trendline is needed to achieve a bullish breakout. The EWT/SPX ratio along the bottom of Chart 6 shows that Taiwan has been an underachiever since the start of 2004 (just like the SOX Index). That means that the recent bullish breakout in the Semiconductor Index could be signalling better days ahead for Asian markets with a heavy chip and technology weighting.

Chart 5

Chart 6