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Semiconductors have been dead weight on the

Nasdaq

averages since the summer lows, but there's finally some good news. The Semiconductor Index (SOX) broke out of its two-month trading range last week. Does this reawakening mark the start of a resurgence for the sector, or will buyers get sucked into yet another bag-holding expedition?

Let's start to answer that question with a look at the SOX's chart. Note the rectangle pattern beginning in mid-September. The SOX index rallied above resistance at 475 last Tuesday and held its ground well throughout the week. This sets the stage for a continued recovery that could take the index though 500 by year's end.

But that tells us just half the story.

Technicians look at both the

Semiconductor HOLDRs

(SMH) - Get Report

exchange-traded fund and the SOX index to measure chip-sector progress. The price patterns of these instruments are often in conflict, because they're constructed differently. Specifically, sector giant

Intel

(INTC) - Get Report

is given a much heavier weighting in the exchange-traded fund than in the index.

Upside progress for the Semiconductor HOLDRS chart isn't as clear-cut as that for its kissing cousin. In particular, the September and October highs were quite ragged, making it hard to measure the importance of last week's uptick. In fact, the fund is still trading below its October peak of $35.95 (though not by much), while the index ran to four-month highs last week.

These instruments share a number of positives, despite the pattern divergence. Both are now trading above their 200-day moving averages, indicating that they've finally mounted long-term resistance. And both have printed wide-range, upward surges off these levels. This marks bullish momentum that should be sustained in the weeks ahead.

Personally, though, I'd like to see another pullback before I get interested in buying the chip sector. The price patterns on most of these stocks aren't too exciting, but that might change if we get a few weeks of consolidation at higher prices. It's also very important that the SOX index hold above support between 470 and 475 on the next downturn.

Intel might help both instruments in the short term, but its longer-term outlook remains clouded. Look at the peaks and valleys on the weekly chart. The stock has been unable to print a single higher high since 2001. It now looks like the current recovery could fail as price approaches the mid-$20s.

Note how the stock would fill its January gap at the price level where the lower highs converge. Obviously this will be the place to watch for a change in the status quo, but I doubt these levels will come into play before the middle of January. That might coincide with the company's fourth-quarter earnings release.

I have two chip stocks for traders and investors to watch while we wait for the broad sector to reveal its true intentions. These issues are group leaders that should continue to outperform through year's end. They're also nearing breakout levels that might trigger sharp rallies with high profit potential.

Lam Research

(LRCX) - Get Report

ran up to $56.81 in early 2000, at the height of the bubble. It then lost more than 85% of its value before bouncing in 2002 and starting a long-term recovery. The stock returned to the six-year high this week after carving out a bullish consolidation pattern. This sets the stage for a multiyear breakout.

Timing is everything with this long-term pattern. This is a volatile stock, and jumping in too early could easily trigger a substantial loss. The pattern structure suggests the stock is likely to pull back to test support at $50 before it moves substantially higher. That decline would offer a more favorable reward-to-risk entry than chasing a breakout.

Anadigics

(ANAD)

dropped through strong support in 2002 and has been playing off that level for the last four years. The stock rolled over just below resistance in 2004 and returned to that high earlier this year. It's been carving out a broad cup-and-handle pattern, suggesting it wants to move higher.

There's almost 1 point between the top of this breakout pattern and the bottom of long-term resistance, so look for whipsaws as price attempts to remount the double digits. A solid thrust over the "round number" 10 should issue a reliable buy signal for a sustained uptrend into the mid- to upper teens.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Anadigics 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.

At the time of publication, Farley had no positions in any of the stocks mentioned in this column, 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 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;

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