Semiconductors Take a Leading Role

by Tyler Craig | July 19, 2012 12:41 pm

In an attempt to determine their market bias, many traders focus on analyzing the major market indexes like the S&P 500, Dow Jones Industrials or Nasdaq Composite. Focusing on the big three is never a bad idea, yet many traders could improve their view of market movements by looking beneath the surface at sector performance.

Determining if a market rally is driven by defensive sectors like utilities and consumer staples, or offensive sectors like technology and cyclical, can provide insight into the overall health and sustainability of the uptrend.

The beauty of Wednesday’s triple-digit Dow gain was that it was driven primarily by these so-called offensive sectors. The semiconductor sector, represented by Merrill Lynch Semiconductors HOLDRS ETF (NYSEARCA:SMH[1]), boasted the best performance, gaining 3.5% on the back of Intel’s (NASDAQ:INTC[2]) earnings announcement.

What’s interesting about the semis’ strength is it marks a decisive change in character. Until yesterday, the semiconductor sector had been drastically underperforming the broader market. A continued sign of strength from semis would serve as yet one more indication that the bulls have wrested control of the market.

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With yesterday’s surge, the SMH successfully tested a key prior support level, thereby forming a potential double bottom pattern. Traders comfortable with betting the SMH will not breach the this support level might consider selling the August 30 put option for 50 cents or better.

If SMH remains above $30 by August expiration, the put will expire worthless and traders will keep the $50 premium. Alternatively, if SMH falls beneath $30 traders, will be required to purchase 100 shares at a cost basis of $29.50 at August expiration.

At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.

  1. SMH:
  2. INTC:

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