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THE SEMICONDUCTOR CATALYST

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While if is often difficult, if not impossible, to predict the fundamental catalyst, the approaching technical catalyst is clear for the Semiconductor HOLDRS (SMH). Key support and resistance are readily identifiable as well as two important patterns. With the group holding great sway over the market, the impending breakout is likely to have far reaching consequences.

The potential bullish setup looks like a falling price channel. SMH more than doubled from Feb-03 to Jan-04. The subsequent decline retraced 38-50% and formed a falling price channel. A move above 39 would break the upper trendline and prior high. This would signal a continuation higher and project a move above the January high. Obviously, this would be bullish for the Nasdaq and overall market.

The opposing pattern is a head-and-shoulders reversal. The left shoulder formed in Sept-03, the head in Jan-04 and the right shoulder is currently under construction. A move below 34 would confirm the pattern and project further weakness to around 24.

Chip Anderson
About the author: is the founder and president of StockCharts.com. He founded the company after working as a Windows developer and corporate consultant at Microsoft from 1987 to 1997. Since 1999, Chip has guided the growth and development of StockCharts.com into a trusted financial enterprise and highly-valued resource in the industry. In this blog, Chip shares his tips and tricks on how to maximize the tools and resources available at StockCharts.com, and provides updates about new features or additions to the site. Learn More
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