The PHLX Semiconductor Index (SOX) and the sector's top exchange-traded funds have finally cleared November 2008 resistance. This notable breakout could speed up the chip recovery that began in the fourth quarter of last year. That's good news for long-suffering shareholders and for the tech indices that are heavily weighted in these instruments.

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Market players look at chip stocks as cyclical plays, rather than growth issues, so it's no surprise the group is doing well, in light of intense speculation that the deep recession is finally nearing its end. But this is a two-edged sword, because the sector might cool down, along with other cyclicals, once a new economic cycle has been firmly established.

So, as usual with these issues, timing is everything when it comes to making money. Also keep in mind that the sector underperformed the broad market badly during the last bull cycle, because, in many ways, these companies have become the toasters of our modern era - once considered high-tech but now commonplace and considered a commodity. For this reason, it's best to stick with the bluest of blue chips and the most speculative plays.

Speaking of blue chips, sector giant

Intel

(INTC) - Get Report

dropped to the low of the 2000-to-2002 bear market in November and then shot higher into December. That recovery attempt failed and gave way to a selloff that found considerable support when it approached the 2008 low. The stock then surged higher, triggering a good-looking double-bottom reversal.

The chipmaker closed above its 200-day moving average on Monday, for the first time since Sept. 2, 2008. The rally came after a six-week consolidation pattern, and it signals a notable breakout. Reward/risk is quite favorable here, because the stock has a clear shot at running higher into longer-term resistance near $20.

The

Semiconductor HOLDRs Trust

(SMH) - Get Report

, which has a 23% Intel weighting, rallied above resistance at the November swing high on Monday and also closed above the 200-day moving average. Two charting features stand out as it attempts to gain ground here. First, there's an unfilled gap at $23, which should offer a magnetic target in the next few weeks.

Second, major resistance has been carved out at the July 2008 breakdown at $27. The fund will have a tough time rallying above that level, so any positions taken "down here" should be exited on or before a test of that barrier. Even so, that would mark a sizable percentage gain from Tuesday's close at $20.95.

Broadcom

(BRCM)

has been a sector leader throughout 2009, but recent volatility triggered a pause in the upward trajectory. The stock gapped down on heavy volume after the April 21 earnings release and tagged support at the 50- and 200-day moving averages. It then shot higher, hit a nominal new high and started to pull back last week.

This price action has organized itself into a bullish "flag on a pole" that predicts a rally equal in size to the slingshot that began with the gap down. This favors a fresh breakout and run-up to $28.50 before momentum takes another holiday. Notably, that price level corresponds with resistance at the August 2008 swing high.

SanDisk

(SNDK)

got pummeled last October, dropping over 40% in one session, after a poorly received earnings report. The stock bottomed out in November and posted a bullish higher low in March. It finally cleared the big gap in March and rallied above the 200-day moving average on April 22.

The stock has been basing at new support for the last two weeks, while accumulation keeps moving higher. This is a bullish sign that it's getting ready to start another leg in its six-month uptrend. It could be clear sailing for the flash memory maker once that move gets under way, with the September swing high at $23.50 offering a logical reward target.

Brooke Automation

(BRKS) - Get Report

lies at the other end of the spectrum from today's other entries, sporting just a $412 million market cap. The equipment maker plunged from $11 to $3 last year and started to move higher in November. The recovery effort stalled in January, giving way to a pullback that tested the bear market low in early March.

The stock has been moving higher since that time and is now testing resistance at the 200-day moving average. Note how it has carved out a small-scale cup-and-handle pattern in the last two weeks. This price action could yield a breakout that sets the stage for a continued uptrend that lifts the stock into the September high at $11.30 later in the year.

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

Know What You Own:

Other semiconductor stocks include

Micron

(MU) - Get Report

,

Rambus

(RMBS) - Get Report

,

Texas Instruments

(TXN) - Get Report

and

Advanced Micro Devices

(AMD) - Get Report

.

At the time of publication, Farley was long INTC and BRCM, although holdings can change at any time.

Alan Farley is a private trader and publisher of

Hard Right Edge

, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of

The Daily Swing Trade

, a premium product that outlines his charts and analysis. Farley has also been featured in

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,

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,

Tech Week

,

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,

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,

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,

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and

Online Investor

. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

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