Will Semi Stocks Push Tech Higher?

05/10/2011 10:02 am EST

Focus: STRATEGIES

Thomas Aspray

, Professional Trader & Analyst

Semiconductor companies are poised for a breakout, which could be exactly what the techs need to begin the next push forward. Here, I discuss a sector ETF and two component firms that could lead the charge.

The technology sector is still stalled below the February lows, and an upside breakout may be needed to push the major averages to the next major upside targets. Many have been impressed by the tech earnings this quarter.

Despite this, the technology stocks still seem to be out of favor by many analysts, and this week’s action may be critical.

Looking at the components of the semiconductor industry group, you get a mixed picture—but the chart of the Semiconductor HOLDRs Trust ETF (SMH) does look positive. As for the individual companies, I favor those that have successfully held above the 2010 highs and show positive volume patterns.

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Chart Analysis: The daily chart of the Semiconductor HOLDRs Trust (SMH) has developed a broad trading range (lines a and c) since the February highs. SMH was a bit lower Monday, and needs a strong close above $37 to break out.

  • A completion of the trading range would give upside targets in the $41 to $42 area
  • Minor support now sits at $36.67, with further levels in the $36 to $36.35 area (line b). The daily uptrend is around $34.60
  • The daily OBV has already moved above its previous highs (line d) and is well above its moving average support

Kla-Tencor Corporation (KLAC) is a $7.5 billion California-based company that is a member of the Nasdaq-100 Semiconductor Equipment & Materials industry group. It yields 2.2%, as it is one the new breed of tech stocks that pays a dividend.

  • Over the past few weeks, KLAC has pulled back to test the 38.2% support level on the weekly chart, about $42, after peaking in February at $51.83. The 50% support sits at $39
  • The correction has so far held well above the 2010 high (line e) of $37.42, which is a positive sign
  • The weekly OBV has turned up sharply, and with a higher weekly close (above $44.96) it should move back above its WMA
  • There is additional resistance at $48.09, and a close above this level will confirm a resumption of the uptrend. KLAC had a high of $62.67 in 2007

NEXT: What it Means and How to Profit

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NVIDIA Corporation (NVDA) is one of the more widely watched semiconductor companies, and it is scheduled to release earnings after the close on Thursday.

  • NVDA has corrected sharply from the February highs of $26.17, as it has dropped back to test the 50% support and the daily uptrend (line a) in the $16.60 to $17.35 area. The 61.8% retracement support is at $15.30
  • There is short-term support now at $18.40
  • The daily OBV has also turned up from support (line b). This is consistent with a further rally. Meanwhile, the weekly OBV (not shown) needs a stronger rally to move back above its WMA
  • Once above the recent highs at $20.44, the next resistance is in the $21.70 to $22.45 area. If NVDA is able to break above the February highs, the next targets are the 2008 highs at $35.90

What it Means: The tech sector still shows positive daily relative performance, but really needs to surpass its recent highs to signal a significant move to the upside. This clearly looks possible for SMH.

The two semiconductor stocks have the potential to rally 15% from current levels, and traders should take a look at them on a short-term pullback.

How to Profit: I would go 50% long SMH at $36.12 and 50% at $35.66, with a stop at $33.44 (risk of approx. 6.8%). On a move above $37.40, raise the stop to $35.77.

For KLAC, I would go 50% long at $44.66 and 50% at $43.88, with a stop at $41.18 (risk of approx. 7%). On a move above $48.10, raise the stop to $43.77.

With NVDA’s earnings on Thursday, this becomes a tougher recommendation, as I would favor buying on a significant pullback—but if the earnings are strong, we are unlikely to get it. I would go 50% long NVDA at $18.66 and 50% at $18.14, with a stop at $16.74 (risk of approx. 9%). On a move above $21.10, raise the stop to $17.77.

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