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A big volume surge in chip stocks—much like the one that preceded the rally in homebuilders—is unfolding now, and two stocks in particular stand out as the most compelling buys.

Stocks put in another impressive performance on Wednesday, and the market internals, which turned positive in the latter part of December, have confirmed the price action by moving above the October highs. They had been lagging a bit last week.

The technical action of the mid- and small-cap stocks has also improved, as the iShares Russell 2000 Index Fund (IWM) closed above the major 61.8% Fibonacci retracement resistance at $77. The next upside targets are 3%-5% higher.

The technology sector is also looking strong, as its relative performance has been improving over the past few weeks. The daily chart of the PowerShares QQQ Trust (QQQ) has closed well above the October highs and resistance at line a. The July highs are at $59.83 with the 127.2% Fibonacci retracement target at $61.06.

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The Nasdaq 100 Advance/Decline (A/D) line broke its downtrend (line d) on December 21 and shows a bullish zigzag formation, as it has surpassed the November highs (line c) and is close to the highs from last summer. This indicates that even a sharp couple-day correction is likely to be followed by even higher prices.

Volume surged in the semiconductor stocks, as several including Micron Technology, Inc. (MU) and Photronics, Inc. (PLAB) have completed reverse head-and-shoulders (H&S) bottom formations. Both rose sharply on high volume yesterday.

A similar volume surge in the homebuilders in October led to sharply higher prices, and right now, quite a few of the semiconductor charts look very good. There are two in particular that I like best.

NEXT: 2 Chip Stocks That Look Strongest Now

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