Some thoughts on the semiconductor index (SOX)
These are trying times for those holding long positions in semiconductor stocks but I think we are nearing a trading bottom, if not THE bottom for this down cycle. The SOX has major support at 240. Check out the monthly chart and you will see what I mean. You can draw a horizontal line under the lows at 240 going back to January 1997. The SOX closed at an eighteen month low today and has retraced 40% from the high it reached in August 1997 at 405.48. Here is raw data for those who don't have access to charts.
January 97: Low 234.73
March 97: Low 247.22
April 97: Low 253.38
December 97: Low 242.82
January 98: Low 242.79
Today: Low and close 244.16
We had a bull market in the SOX from May 94 to September 95 (16 months) when the index went up 132.3%. It then retraced for the next 10 months, declining 43.3% before rallying 144.7% over the next 14 months. That brings us to today. The index has declined 36.0% so far on this cycle over the past 9 months.
The SOX is also tremendously oversold. The daily stochastic is at %K = 3, %D = 5. As a point of reference, anything below 20 indicates an oversold condition and we are well below that. Prior to this, the lowest that the stochastic has been on the daily chart over the past year is %K = 13, %K = 18. That occurred in October 97 just before the index bottomed and rallied 36% over the next three months.
The daily RSI is at 4 and anything below 20 indicates an oversold condition. Like the stochastic, this indicator hasn't been lower than this on the daily chart for at least the last 12 months. The lowest it has been prior to this was 13 in October 97.
The DMI is at +DI = 3, -DI = 49, and ADX = 78. This too indicates a grossly oversold condition. The last time the daily DMI got this oversold was also in October 97 just before the SOX rallied. I should also note that the SOX rallied from a low of 275.28 on October 28, 1997 to a high of 331.27 on November 5, 1997 for a six day gain of 20.3%.
Normally, a stock (or index) won't be able to penetrate support when it is this oversold. Generally it has to rally and then sell off again before gaining enough momentum to break through support. The reason is because buyers will normally come into the market on the first dip and and the majority of sellers have already done so. The supply and demand dynamics support the price. It is important what happens after the first rally. I would expect a move up and then a retracement. If the retracement does not go below the previous low and the index turns back up, then we are in good shape. This is known as a cup and handle pattern and would be very bullish. If however, the previous lows are taken out on the retracement, it's probably adios and we are in for a bear market in semiconductor stocks. Also, if the index is unable to hold support now while being this oversold, I think we are in bad shape.
One final note, as of 5:15 pm eastern time, INTC was trading up 2 to 68 in after hours trading so we should see a pop in the morning in the SOX, NASDAQ, and many semiconductor stocks. It will be important from a technical perspective that the semiconductor stocks hold their gains. People have been selling on strength and it won't be until buyers continue to step up on rallies that we will be out of the woods.
Just my thoughts,
Dan |
