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.