Should Investors Cash in Their Chips (Stocks) After Deals Send SOX to Highs?

NEW YORK (TheStreet) -- The PHLX Semiconductor Index, known as the SOX, hit a multiyear high earlier this month on news of two big mergers in the chip industry. The question for investors is whether the chip stocks will go higher or are ripe for a selloff.

To help answer that question, here's a technical look at both the SOX and seven stocks that are components of the index.

Last year, SOX outperformed all major equity averages with a gain of 28%. The index set a multiyear intraday high of 751.21 on June 1, fueled by two mergers: Avago Technologies (AVGO agreed to acquire rival  Broadcom  (BRCM) in a deal worth $37 billion, and Intel (INTC agreed to buy Altera (ALTR) for $16.7 billion in a strategy to grow beyond chips for PCs.

Let's take a look at SOX charts to help chip investors determine whether it's time to buy, sell or hold.

Here's the daily chart for the SOX.


Courtesy of MetaStock Xenith

The SOX closed at 712.37 on Monday, down 5.2% from its multiyear intraday high on June 1. The index is above its 50-day and 200-day simple moving averages of 707.82 and 674.38, respectively. The SOX has been above its 200-day simple moving average since Oct. 21, when the average was 596.13.

Here's the weekly chart for the SOX.


Courtesy of MetaStock Xenith

The weekly chart ended last week positive with the close on Friday of 726.29, which was above its key weekly moving average of 716.38. The momentum reading rose to 73.81 last week from 69.25 on May 28. To have a negative weekly chart on Friday, the SOX needs to end the week below the key weekly moving average projected to decline to 715.57 this week, and momentum would have to end the week below 73.81. At Monday's close, however, this week's momentum reading is projected to rise to 74.24. We may have to wait another week or two to have a negative weekly chart for the SOX.

The SOX has been above its 200-week simple moving average since the week of Nov. 23, 2012, when the average was 359.05. This "reversion to the mean" has risen since then to 501.32 this week.

Here now are the technical profiles of seven stocks in the SOX.

Applied Materials (AMAT) closed at $19.87 on Monday, down 23% from its multiyear high of $25.71 set on Dec 23. The stock is below its 50-day and 200-day simple moving averages of $20.90 and $22.54, respectively. The weekly chart is negative but oversold with the stock below its key weekly moving average of $20.60.

Investors looking to buy Applied Materials should place a good-till-canceled limit order to purchase the stock if it drops to $18.18, which is a key level on technical charts until the end of June.

Investors looking to reduce holdings should place a good-till-canceled limit order to sell stock if it rises to $23.18, which is a key level on technical charts until the end of June.

Avago closed at $138.63 on Monday, down 7.9% from its all-time intraday high of $150.50 set on June 1. The stock is above its 50-day and 200-day simple moving averages of $127.98 and $105.51, respectively. The weekly chart is positive with the stock above its key weekly moving average of $133.85.

Investors looking to buy Avago should place a good-till-canceled limit order to purchase the stock if it drops to $122.18, which is a key level on technical charts until the end of June.

Investors looking to reduce holdings should place a good-till-canceled limit order to sell stock if it rises to $146.50, which is a key level on technical charts until the end of June.

Intel closed at $31.30 on Monday, down 17% from its multiyear high of $37.90 set on Dec. 5. The stock is below its 50-day and 200-day simple moving averages of $32.51 and $33.95, respectively. The weekly chart is negative with the stock below its key weekly moving average of $32.58.

Investors looking to buy Intel should place a good-till-canceled limit order to purchase the stock if it drops to $30.01, which is a key level on technical charts until the end of 2015.

Investors looking to reduce holdings should place a good-till-canceled limit order to sell stock if it rises to $33.16, which is a key level on technical charts until the end of June.

KLA-Tencor (KLAC) closed at $55.97 on Monday, down 24% from its multiyear high of $73.12 set on Dec 23. The stock is below its 50-day and 200-day simple moving averages of $68.98 and $62.82, respectively. The weekly chart is negative with the stock below its key weekly moving average of $58.60.

Investors looking to buy KLA-Tencor should place a good-till-canceled limit order to purchase the stock if it drops to $45.79, which is a key level on technical charts until the end of 2015.

Investors looking to reduce holdings should place a good-till-canceled limit order to sell stock if it rises to $59.67, which is a key level on technical charts until the end of June.

Lam Research (LRCX) closed at $82.26 on Monday, down 4% from its multiyear high of $85.70 set on Dec. 4. The stock is above its 50-day and 200-day simple moving averages of $76.81 and $77.29, respectively. The weekly chart is positive with the stock above its key weekly moving average of $79.98.

Investors looking to buy Lam Research should place a good-till-canceled limit order to purchase the stock if it drops to $61.18, which is a key level on technical charts until the end of June.

Investors looking to reduce holdings should place a good-till-canceled limit order to sell stock if it rises to $84.56, which is a key level on technical charts until the end of June.

Micron (MU) closed at $25.91 on Monday, down 29% from its multiyear high of $36.59 set on Dec. 8. The stock is below its 50-day and 200-day simple moving averages of $27.66 and $30.75, respectively. The weekly chart is negative with the stock below its key weekly moving average of $27.28.

Investors looking to buy Micron should place a good-till-canceled limit order to purchase the stock if it drops to $23.81, which is a key level on technical charts until the end of June.

Investors looking to reduce holdings should place a good-till-canceled limit order to sell stock if it rises to $26.87, which is a key level on technical charts until the end of June.

Skyworks Solutions (SWKS) closed at $102.32 on Monday, down 8.3% from its all-time intraday high of $111.60 set on June 1. The stock is above its 50-day and 200-day simple moving averages of $99.30 and $77.09, respectively. The weekly chart is positive but overbought with the stock above its key weekly moving average of $101.23.

Investors looking to buy Skyworks should place a good-till-canceled limit order to purchase the stock if it drops to $86.22, which is a key level on technical charts until the end of June.

Investors looking to reduce holdings should place a good-till-canceled limit order to sell stock if it rises to $114.95, which is a key level on technical charts until the end of June.

Investors not familiar with technical analysis should begin with the notion that a price chart for a stock shows a road map of past price performance, which provides guidance for predicting future share-price direction.

Here's how to read a daily chart. There are two moving averages to follow; the 50-day simple moving average is in blue, while the 200-day simple moving average is in green.

Here's how to read a weekly chart. This chart shows weekly price bars going back to the beginning of 2007 and thus includes the crash of 2008, and then the current bull market for stocks that began in March 2009. The red line tracks the ups and downs of the key weekly moving average. The green line is the 200-week simple moving average. The red line that oscillates along the bottom of the chart is the momentum reading on a scale of 00.00 to 100.00. A reading below 20.00 is oversold and a reading above 80.00 is overbought.

A technically positive weekly chart occurs when a stock ends a week above its key weekly moving average with the momentum reading rising above 20.00.

A technically negative weekly chart occurs when a stock ends a week below its key weekly moving average with the momentum reading declining below 80.00.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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