Last week, Intel's (INTC) - Get Report earnings report triggered renewed buying interest in the semiconductor space, even though the news had a mildly negative effect on the stock itself. This split reaction wasn't unusual, because equipment and fabrication suppliers should book higher annual revenue, in response to increased capital spending and relatively low inventory levels.
While Intel is still trading marginally lower this week, this is a net positive, because it hasn't dropped like a rock, like it did after most earnings reports in 2009 and 2010. The relatively mild reaction could presage far better days, including a strong uptick that finally lifts price above multiyear congestion and to the top of the Nasdaq-100 leadership list.
The monthly chart tells the tale, with an all-time high at $75.81 in 2000, followed by a vertical decline that dropped price over 80% by the end of 2002. The 2004 bounce up to $34.60 was a milestone, because it marked the inception point of a declining highs trendline (red line) that's still in force more than seven years later.
The trendline is now situated near $23.25, or about 2 points above Tuesday's close. Positive signals when the stock pushes through that line are likely to attract intense buying interest. In turn, the event should yield a major uptrend that lifts the stock to much higher ground. The initial target for that rally, when it finally comes, will be the 2001 high in the mid-$30s.
Despite the great opportunity, I don't recommend jumping the gun and getting into this stock before it clears that massive resistance level. Clearly, overeager market players have been sliced and diced by that trendline in recent years, and it isn't wise to play the anticipation game by assuming risk before Intel's price action fulfills all the technical requirements.
At a minimum, the buy signal will include a high-volume breakout over $23.25. Since the stock is a slow mover, that buying spike could be weeks or even months away, although I expect a generally positive reaction from this day forward. In the meantime, stand aside, even though bullish analysts may be pounding the tables, telling us to take the leap of faith.
For now, I recommend focusing your capital at the other end of spectrum, where small- and mid-cap sector plays could take off like rockets, as a speculative bid grows throughout 2011. However, keep in mind that semiconductors are subject to the same early cyclical impulses that affect paper companies, industrial machinery and building materials.
This classification tells us to stop buying these stocks when the current economic cycle starts to mature. That might happen as early as 2013 or 2014, right after the next presidential election. At that point in time, the entire group could weaken and roll over, in a prelude to the next major downturn. As a result, good market-timing is an absolute necessity when investing in this volatile sector.
Now that I've set the stage, let's look at two small-cap semiconductor stocks that could lead the broad sector to the upside.
sold off from a six-year high at $19.30 in 2007, hitting an all-time low at $1.15 in late 2008. The subsequent recovery has been strong and steady, with the stock now trading near the 38% retracement of the bear market decline. It's been fighting off resistance at this level for the last five weeks, carving out a small consolidation pattern.
Look for a breakout to lift price into double digits for the first time since July 2008. The next rally target lies near $14, with even stronger resistance above $15.50, where an unfilled gap could end the uptrend. Long-term profits taken at that level could yield a double from this week's close, although the uptick might take another year to play out.
is a volatile sector play that broke out above eight-year resistance (green line) at $13.50 in October, when it gapped higher on heavy volume. The uptrend has unfolded in a rising wedge pattern (blue lines), with the upper trendline carving a milder angle of attack than the lower trendline. There are two good spots to buy this stock and one dangerous place to get on board.
I believe most folks will chase the single bad entry, because it requires the least patience of the three options. In a nutshell, you're at major risk if you buy the stock anywhere within the rising wedge, because it's a bearish pattern that favors an eventual breakdown. You can see this unfolding at four key reversals (red circles) since early November.
Instead, wait and buy the breakout over the upper trendline, because that buying surge would support a strong momentum rally that might lift the stock into the mid-$20. Or second, wait patiently until the rising wedge finally breaks to the downside and hits the red line, which will then create a more bullish rising channel pattern.
At the time of publication, Farley had no positions in stocks mentioned, although holdings can change at any time.
Alan Farley is a private trader and publisher of
Hard Right Edge
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