Integrated Device Technology (IDTI) - Get Report designs and manufactures a wide range of semiconductor products. The performance of the stock price is closely correlated to the VanEck Vectors Semiconductor ETF (SMH) - Get Report , but while the fund price has been in rally mode this year, the stock has been consolidating in a symmetrical triangle or wedge pattern on its chart. It is currently testing pattern resistance and looks ready to confirm a breakout and make up lost ground.
There is usually a very high degree of correlation between Integrated Device Technology and the SMH, but that relationship has broken down recently, as reflected in the drop on the correlation coefficient graph below its center line. This week the stock has been testing triangle resistance, and in Thursday's session, it penetrated that trend line on strong volume, closing near the high of the session. The assumption at this point is that the relationship between the stock performance and the performance of the fund is ready to normalize and that the stock should accelerate higher.
On the daily chart, the consolidation can be seen in more detail, with the breakout being signaled by the fact that the relative strength index and the moving average convergence/divergence have both crossed above their center lines, as well as by the fact that the aroon indicator, designed to identify early shifts in trend direction, made a bullish crossover at the beginning of the month. The money flow indicators also turned positive about the same time, with accumulation/distribution moving above its 21-period signal average and Chaikin money flow entering positive territory, readings that suggest that the stock is under accumulation. The combination of positive money flow and momentum indications support the breakout thesis and will be needed to power a continued move higher.
IDTI is a buy at its current level using a trailing percentage stop. The target price projection of a successful pattern breakout is measured by taking the height of the triangle and adding it to the break point. In this case, it targets a large-percentage move.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.