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Stalk the Pattern in Semiconductors

This column was originally published on RealMoney on Jan. 31 at 12:06 p.m. EST. It's being republished as a bonus for TheStreet.com readers.

Chip stocks are leading the market these days and could book additional gains in the weeks ahead. But most group leaders now look overextended. So let's examine five plays on the sector that still show favorable reward-to-risk profiles despite the recent uptick.

Semiconductors flip between constant extremes of buying and selling pressure. This feast-or-famine action can generate unstable patterns that lack well-defined support or resistance levels. The culprits? Short-sellers, who love these stocks and try to pull down every rally.

The real trick in trading semiconductors is to get positioned on the long side before the stocks spike into vertical squeezes. This isn't always possible, but your odds improve greatly when you stalk the patterns, because they often signal that a squeeze is about to happen.

PortalPlayer (PLAY) is a volatile play that benefits from its iPod connection. The stock came public in late 2004 and hit an all-time high at $33.44 almost immediately. It then dropped into a deep correction before testing resistance last October. Following another steep downturn, price returned to the 14-month high on Friday and should break out soon.

Stand aside and watch last Friday's steep gap. The stock might try to fill it in the next week or so before breaking out. A more bullish scenario would be several more days of sideways action at current price levels. This contraction would set the stage for a vertical spike above resistance and through $40.

BTU International (BTUI) builds thermal processing systems for electronics and materials manufacturing industries. The stock rallied to a five-year high in November and dropped into its 50-day moving average before bouncing back toward the high. The overall pattern in the last three months shows a broad symmetrical triangle.

The stock is now grinding just above triangle resistance and may break out soon, with the next rally leg reaching into the low $20s. But accumulation is a bit weak compared with other chip stocks, so it could take time for upside momentum to develop. Note, too, the stock's small float. The best plan is to watch volume closely for a clear signal that investors are piling into new positions.





Marvell Technology (MRVL) hit a major high at $55 just after it came public in 2000. The stock rallied back to this level in November and gapped through it on heavy volume. It's been moving higher since that time in a steady uptrend that shows few signs of running out of steam.

Price gapped above a two-week consolidation pattern last Friday. The stock could fill the gap here and then push up to yet another rally high. Or it may just move sideways for a few more bars before resuming its uptrend. In either case, this exceptionally strong stock might be a good candidate to buy high and sell higher.

Conexant Systems (CNXT) is a chronic sector underperformer that's currently exhibiting positive volume characteristics. The stock has risen almost 400% in the last seven months and has been bought aggressively in recent weeks. But it still has work to do before it regains the respect of investors.

The stock gapped down from $4 to $2.50 in mid-2004 in a high-volume selloff. The current rally has now retraced about 50% of the ugly gap down. While the next rally into $4 would be rewarding for buyers of this stock at current levels, the best trade will come on the first updraft that follows the filling of the gap.

Cypress Semiconductor (CY) returned to its June 2004 recovery high at $16.50 in September. But mounting this key level has turned into a major challenge for the integrated circuits manufacturer. It's been turned away at resistance three times in the last five months. But that could change soon.

The stock rallied back to resistance last Thursday and has been moving sideways in a consolidation pattern for the last two bars. If it can hold current levels for another few days, it could break out and surge quickly into the mid-$20s. That would mark an excellent place to take profits.


Please note that due to factors including low market capitalization and/or insufficient public float, we consider BTU International to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback; click here to send him an email. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

TheStreet.com has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from TheStreet.com.

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