Semiconductor Stocks Still Look Weak

06/23/2011 10:16 am EST

Focus: STOCKS

Thomas Aspray

, Professional Trader & Analyst

Technology and semiconductors have been lagging the S&P 500, and even strong earnings aren’t likely to reverse the negative outlook for the sector ETF and several top stocks.

It has been a rough few weeks for the semiconductor stocks as the Semiconductor HOLDRs Trust (SMH) is down 13% from the early-May highs. This tech industry group has seen several wide swings so far in 2011.

The decline in the semiconductors has been greater than that of the S&P technology sector, which through last week’s lows was down 10% from the early-May highs. During the same period, the S&P 500 was down just over 8%.

The tech earnings so far in 2011 have been stronger than most expected, but the technology sector has continued to lag the overall market. Therefore, as we enter a new earnings season, it will be important to see if the relative performance of the tech sector can improve.

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The Semiconductor HOLDRs Trust (SMH) is testing the 38.2% support this week in the $32.15 area. A higher weekly close would be an encouraging sign.

  • The 50% support stands at $30.60, as SMH hit a low in the summer of 2010 at $24.14
  • The weekly relative performance, or RS analysis, formed a negative divergence at the May highs and closed below support at line b last week
  • The weekly on-balance volume (OBV) also formed a negative divergence at the recent highs (line c), which was followed by a break of the OBV’s uptrend, line d
  • The daily OBV (not shown) is still negative and lies below its declining weighted moving average (WMA)
  • There is a band of resistance for SMH now in the $33.60-$34.60 area

Micron Technology Inc. (MU) is releasing earnings after the close today (June 23). In March, MU rallied briefly after its earnings were released even though the results were weaker than expected. If the numbers are weaker again today, I doubt the market will be as forgiving.

  • MU made a high in February of $11.95 (line e) and is now down 31.6% from those highs
  • The weekly chart has next strong support in the $6.70 area, line f
  • The RS analysis reveals the break of a 16-month uptrend in April 2010, which signaled the decline to the summer lows that same year
  • The RS has just broken below its support at line g, which suggests a further decline for MU
  • The weekly OBV violated its uptrend, line h, in early April. It is below its declining weighted moving average amid very heavy volume last week. The daily OBV (not shown) is also negative

NEXT: More Weak Charts for the Sector's Strong Players

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NVIDIA Corporation (NVDA) is a specialized semiconductor company that peaked in early February at $26.17 and has since fallen 41.5% from the highs, making a recent low of $15.31. The 61.8% retracement support from the 2010 lows at $8.65 is now being tested.

  • There is next support for NVDA in the $13.80-$14.20 area
  • The long-term support in the RS, line b, was broken in March, and short-term support (line c) was just violated
  • The weekly OBV dropped below its uptrend, line d, in early May and is still clearly negative. There are no signs of a bottom from the daily OBV, either
  • There is first resistance at what was previously a support level in the $17.20 area

ARM Holdings, PLC (ARMH) is a designer of microprocessors that is up 188% from the May 2010 lows of $9.50. ARMH has corrected significantly from the April 29 high of $32.18.

  • The 38.2% support level stands at $23.60 with the 50% retracement support at $21
  • The weekly RS is still in a strong uptrend, consistent with ARMH outperforming the S&P 500. It would take a drop below the early-2011 lows to weaken the outlook
  • The weekly OBV is below its weighted moving average but is still holding well above its uptrend, line g. The daily OBV (not shown) is positive
  • Once above the all-time highs at $32.18, the 127.2% Fibonacci target is at $34.25

What It Means: The weak action in the semiconductor group indicates that it is likely to lag the tech sector, as well as the S&P 500.

Micron Technology, Inc. (MU) and NVIDIA Corporation (NVDA) look particularly vulnerable to further declines over the summer months unless the overall market strengthens substantially. On a short-covering rally, they could have decent rebounds, as both are quite oversold.

ARM Holdings, PLC (ARMH) looks very positive from a weekly standpoint and is likely to make new highs later this year.

How to Profit: I see no real buying opportunities in either the Semiconductor HOLDRs Trust (SMH) or any of these semiconductor stocks. Though ARMH may be close to a short-term set-up, buying a technically strong stock in a technically weak industry group is generally not a good idea.

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