From Briefing.com: 3:40PM Chart Watch Semi HOLDRs (SMH): We have touched on the subject of ETFs or exchange trade funds in previous updates but it seemed an opportune time for a little refresher particularly with the widely followed semi sector in an interesting technical position.
First the refresher. HOLDRS are securities that represent an investor’s ownership in the common stock or ADRs of specified companies in a particular sector which allows investors to own a diversified group of stocks in a single investment that trades just like an individual stock and is also highly transparent and liquid.
This is clearly evident for the SMH as it trades an average of 6.7 mln shares per day. Not surprisingly, the SMH mirrors the SOX index although the HOLDR is comprised of 20 stocks while the SOX has 17 components. From a trading perspective it allows market participants to play the entire group eliminating potential whipsaws related to a specific issue.
There are a number of other benefits including the ability to cancel your HOLDRS, take ownership of each of the underlying stocks, and sell an individual component that may be underperforming. For further details see holdrs.com.
The SMH is also in an interesting position from a chart perspective. It has rallied an impressive 28% from low to high this month, taken out its 20 day ema (blue line) and approached its intermediate-term trend indicator (50 day sma, red line).
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However, since it reestablished the downtrend in the spring it has accomplished the same feat on two other occasions (rallied 23% in May and 31% in Aug). During each of these advances it flirted with its 50 day sma but failed to stabilize above this resistance indicating that the underlying negative trend remained intact. Also take note that the posture of the daily stochastic during each of the tests suggested an overbought condition.
If the SMH is to deviate from the previous pattern of failure it will be signaled by relatively limited consolidations, allowing the overextended posture to be worked off. Ideally, pullbacks would hold at or near its 20 day ema with the rally consummate by sustained trade above the key 50 day sma. -- Jim Schroeder, Briefing.com
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