End Is Near for Broad Semi Rally

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Intel (INTC)

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Source: eSignal

For obvious reasons, Intel's (INTC - commentary - Cramer's Take) price action in upcoming weeks will affect sector performance, so let's take a close look at this former market leader. The stock dropped like a rock from December into January, losing 35% of its value. It posted a deep low at $18.05 and entered a grinding recovery that had retraced over 70% of the selloff by May.

The stock ended its rally with a vertical spike that filled the Jan. 4 gap. This is the type of climactic price action that short-sellers love to trade, because it draws in a weak-handed crowd that's easy to trap. The sharp downdraft since then confirms that shorts have indeed regained total control of this issue and aren't letting go.

Accumulation has fallen sharply in the last few weeks, with the stock breaking the 200-day moving average and dropping through key support at the bottom of the bear flag pattern. This violation has triggered a renewed sell signal that exposes the blue chip to a critical test of the 2007 low.

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The outlook for semiconductors this summer isn't bullish by a long shot, at least from the brief analysis posted in today's column. Simply stated, the encouraging sector recovery is over for now, and the group may be headed for a test at the 2008 lows. But, despite all the downward pressure, a few maverick chip stocks could buck the tide.

Silicon Image (SIMG)

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Source: eSignal

In fact, a handful of small and specialized chip operations still exhibit decent buying patterns and higher equity prices.

Silicon Image (SIMG - commentary - Cramer's Take) is one such stock, with its January recovery off a five-year low showing no signs of fizzling out. The stock has more than doubled in the last five months and could hit 10 bucks by late summer.

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Netlogic Microsystems (NETL)

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Source: eSignal

Netlogic Microsystems (NETL - commentary - Cramer's Take) is another success story -- it's the strongest chip stock in my database.

The stock just broke out to a 52-week high and is moving slowly toward a test at the all-time high at $45, posted in 2006. The rally up to that high could reward traders, while investors can focus on the eventual breakout run.

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At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.

Farley is also the author of The Daily Swing Trade, a premium product that outlines his charts and analysis. Farley has also been featured in Barron's, SmartMoney, Tech Week, Active Trader, MoneyCentral, Technical Investor, Bridge Trader and Online Investor. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

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