RECENT BOUNCE IN TAIWAN ISHARES AND TAIWAN SEMICONDUCTOR MAY CARRY SOME GOOD NEWS FOR THE SOX
SEMICONDUCTOR INDEX MAY BE BOTTOMING ... Last week I wrote about how the Semiconductor (SOX) Index was in an area of chart support and starting to show early signs of turning back up again. The daily bars in Chart 1 show the SOX finding new support just above its 200-day moving average. Short-term momentum indicators are also starting to strengthen. The 12-day Rate of Change (ROC), for example, has just broken a down trendline extending back to January. The daily MACD lines (not shown here) have also turned positive. One of the benefits of intermarket work is that chart action in a related market often gives clues to the market we're studying. In this case, I'm talking about a foreign market and Taiwan in particular. I've written before about the close correlation between the SOX and Taiwan. That's because Taiwan has the biggest chip weighting in Asia. The biggest stock in that country is Taiwan Semiconductor. It's no accident that semiconductors were among the first quarter's weakest groups while the Taiwan iShares (EWT) were one of the worst foreign stocks. The good news is that the EWT and TSM are now rising. That may carry good news for the SOX.
Chart 1
TAIWAN ISHARRES CLEAR 50-DAY LINE ... Asian ETFs have been among the strongest in the world. Except for the one shown in the next chart. Taiwan iShares peaked at the end of January and continued to to drop until the middle of March. After bouncing off its 200-day line, however, the EWT has moved back over its 50-day line and looks to be bottoming. There's also been a notable pickup in upside volume over the last week which is another positive sign. For comparison purposes, I've placed the SOX Index on top of the EWT chart. You can see their close correlation. A study of the relative strength line of the EWT (vs. the S&P 500) beneath Chart 2 is even more convincing. I've placed arrows at the last two turning points on the EWT/S&P ratio and then placed the same arrows on the SOX chart. The arrows on both charts line up very closely. If that close correlation continues, then the upturn in the EWT may mean that the SOX is about to do the same. The EWT is getting help from its biggest component, which is Taiwan Semiconductor.
Chart 2
TAIWAN SEMICONDUCTOR TURNS UP... TSM is the biggest stock in the EWT and, as a result, the two charts look similar. Chart 3 shows TSM also climbing back over its 50-day moving average. The daily MACD lines have turned positive for the first time since January. That's good news for Taiwan iShares. And what's good news for the EWT may also be good news for the SOX.
Chart 3
A LONGER-TERM LOOK ... I've shown the next chart before, but it's worth another look. It's a five-year chart of the SOX Index. The last time I showed it the SOX was challenging its early 2004 peak near 560 (upper flat line). So far, the pullback from that chart barrier has been relatively mild and no chart damage has been done. In fact, the SOX remains well above the rising support line drawn under the 2003, 2004, and 2005 reaction lows. Sooner or later, one of those two lines will get broken. Right now, however, the odds appear to favor the upper line being broken first. That would be a bullish development for chip stocks. That's another reason why this week's upturn in the Taiwan market may be a sign that the SOX may be preparing for another run at the 2004 peak.
Chart 4
