Four Short-Term Chip Plays

These names should buck the trend and outperform in the coming weeks.
By Alan Farley ,

Chip stocks have fallen from grace in recent years, trailing broad market performance by a wide margin. The group is finally turning higher after a particularly horrendous stretch, so

all eyes will be watching

for a firm recovery. But the sector is likely to fracture into a stock-picker's market in coming months, with the biggest guns trailing their smaller peers.

I expect these stocks to remain in a bear market long after the major averages rally back to new highs. The fickle nature of technological change and cyclical nature of chip demand have combined to undermine the sector's long-established growth engine. These adverse forces might not ease up for the next five to 10 years.

The tech sector's rapid evolution makes it hard for chip companies to locate and exploit new revenue sources. This is especially true with consumer-oriented products like mobile phones, computers and GPS devices. The hardware in these gadgets goes stale in just a few years, inducing upgrades that no longer favor a particular chipset.

Realistically,

chip stocks aren't a good place to invest

without a specific time horizon in which to close out positions and take profits. Consider

Intel

(INTC) - Get Report

, which is now trading at the same level it did back in 1998. Do you want your tech capital tied up for a decade and wind up in the same place you started, except for the dividends?

This brings me to the subject of today's column. I ran my database and pulled up four chip stocks that should move higher in the weeks ahead. Just keep in mind the limitations of these time-sensitive instruments and be ready to take profits when the bull story guiding these stocks higher starts to fade.

Teradyne

Click here for larger image.

Source: eSignal

Teradyne

(TER) - Get Report

builds testing systems for the semiconductor industry. The stock sold off to a five-year low in January in the last leg of a decline that cut company shares in half in just seven months. Price then bounced in a steady rise that shows stable buying interest and few institutional sellers.

The stock returned to resistance at the 200-day moving average in February and broke out last week. This sets the stage for a continued recovery that could reach the upper teens by the middle of the second quarter. The long-term chart shows multiyear resistance near $18. This level will likely stall the uptrend and trigger another downturn.

Microsemi

Click here for larger image.

Source: eSignal

Microsemi

(MSCC)

focuses on the design and manufacture of analog and mixed-signal integrated circuits. The weekly view shows price lifting to an all time high at $31.85 in March 2006 and pulling back. It found support in the mid-teens and bounced back to within a few points of the high in 2007 before rolling over once again.

The downside since then has been limited, with the stock holding well above the 2006 lows and building a five-month base under $23.50. The stock broke out above this level last week and is setting up to test the 2007 high. The big triangle now comes into play, with a run over $30 triggering longer-term buying signals.

Rambus

Click here for larger image.

Source: eSignal

Memory-chip maker

Rambus

(RMBS) - Get Report

has been engaged in litigation with its rivals for many years, but that now appears to be winding down. The stock bounced to a recovery high at $24 in November 2006 and sold off. It built a series of higher lows through 2007 and then spiked back to 16-month resistance in late March.

Price has been consolidating at this key level for the last two weeks. It's a coin flip whether it breaks out right away or pulls back to test the considerable gains posted on the big rally bar. In either case, expect this former momentum favorite to move higher in the second quarter and start a run toward the April 2006 high in the mid-40s.

Micron

Click here for larger image.

Source: eSignal

Micron Technology

(MU) - Get Report

is a memory-chipmaker that's fallen on hard times in recent years, with the collapse of DRAM pricing. The stock broke five-year support at $6.60 in January and fell to a 13-year low, before bouncing up to $8 in February. That recovery attempt failed, with price testing the low less than two weeks ago.

Last week's high-volume recovery points to a double-bottom pattern that should trigger a major reversal in fortune for this issue. The change in trend will take time, so be patient while looking for a low-risk entry. In the short term, price should consolidate near the 50-day moving average and then rally into a test at longer-term resistance below $10.

Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.

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.

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.

Loading ...