Semiconductor stocks — as represented by the popular Market Vectors Semiconductor ETF (NYSEARCA:SMH) — rallied nicely in October along with the broader market. And while the SMH didn’t return to its year-to-date highs, it did stage a V-shaped recovery off the late-August lows.
While the SMH — and thus plenty of single semiconductor stocks — are near-term overbought, the posture remains constructive for another leg higher into year’s end.
Active investors could look to buy the next bullish reversal.
For reference and transparency purposes, let me highlight that on Oct. 2 I discussed a trade to buy shares of Intel Corporation (NASDAQ:INTC), which is the largest component of the SMH at about a 9% weight. Both of my price targets in INTC stock ($32 and $34-$35) have since been met.
The SMH is seeing a good amount of divergences among its largest holdings. While some stocks like Intel rallied sharply in September and October, others like Qualcomm (NASDAQ:QCOM) after Thursday’s large drop are right back below their September lows. As such, I am favoring to look at the semiconductor space as an industry rather than at single-name stock opportunities.
SMH ETF Charts
Looking at the multiyear chart of the SMH ETF, note that despite the sharp 30% drop from June into August, the 2009 diagonal support line held on a weekly closing basis. Horizontal support as marked by the red dotted line also did its part and held in August and thus created a good confluence area of support.
On the daily chart, we see that while the ascent off the August lows for the SMH has been steep, it has also been orderly. After a pullback to a higher low in September, a next extension higher took it right above its red 200-day moving average.
So far the ETF has been consolidating above this moving average, but overbought conditions in the broader market could also see the semiconductor space pull back to a better line of support before attempting one more push higher into year’s end or early 2016.
A first area of support is the September highs around the $52 area — former resistance that now could become support. This is the area where active investors should look out for any potential next bullish reversals to get long the SMH. Alternatively, should the $52 area not hold a second level of support is in the $48 area.
The upside target into year’s end for the SMH depends how deep the next pullback or consolidation phase is. If the $52 area holds, then the $58-$60 area is a next upside target. If a pullback toward the $48 area occurs, then the mid-$50s may be all we can hope for on the upside.
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Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.
