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Semiconductor HOLDRs Trust

(SMH) - Get Free Report

rallied up and through 11-month resistance last week, raising hopes the key sector will join the major indices at new highs in coming months. But there's reason to be skeptical about the nascent rally, given the group's fondness for false breakouts and stomach-wrenching whipsaws.

So, let's enjoy the new uptrend while it lasts, but remain vigilant in case the sector turns tail once again and flops back into no man's land. In this regard, let's examine the quality of last week's chip breakout and lay odds about its persistence or failure in the weeks ahead.

Clearly the timing of the move raises a few eyebrows. It happened right in the middle of options expiration, a volatile period that's notorious for lifting losing sectors while tossing winning groups back to earth. Just ask oil and gas shareholders how they feel at the end of most expiration weeks. Exhausted, depressed and bewildered comes to mind.

Chip-sector leadership needs to be watched this week to see how the group acts now that expiration is out of the way. In particular, I'd focus on any pullback that reaches the May 2006 gap at 35. This is the price pivot that gave the instrument so much trouble between October and April. A breakdown there would constitute a major failure.

Alternatively, I'd be a buyer at that level as long as it doesn't take a big gap down to get there. The decline would offer a classic dip trade with a reasonable reward-to-risk profile. But I have a tough time believing the exchange-traded fund will give away such an easy trade, given its propensity to play havoc with majority opinion.

Also, note the congestion pattern between 36 and 40 going back to early 2006. This predicts the instrument won't be starting a runaway move to the upside anytime soon. Instead, I'd look for progress to mark out two steps forward, one step back, while layers of overhead supply get absorbed.

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

Alan Farley is a professional trader and author of

The Master Swing Trader

. Farley also runs a Web site called, 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;

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