Sharks, Chips and Dip

• Posted by Greg Harmon
• on May 26th, 2017

We end the week with a long term view on the Semiconductor Index. These stocks have been driving a lot of the gains in the market the last few months, outside of the FAANG favorites. The Index has moved relentlessly higher since the early 2016 low. But is it time for a dip to follow that advance in the chips? The chart below suggests there is still a lot of room to run.

This chart shows the monthly price action for the Semiconductor Index over the past 20 years. There are 5 items that need to be noted on the chart. The first is the Shark harmonic pattern playing out. The two triangles show the the extent of the pattern, with its Potential Reversal Zone (PRZ) at 1175. This would be a 88.6% retracement of the drop from the Tech bubble high to its low. But the Shark also has the potential to extend to a 1.13% retracement. That would give a PRZ II at 1440. Either one still leaves upside.

The second item to note is the 3 Drives pattern that has been playing out since the 2009 low. Less noticeable from the log scale on the chart, the legs higher have been 161.8% extensions of the previous leg. This would put the pattern completion at 1240, right between the two PRZ’s of the Shark from above. The dotted line marks the top of the 2000 high area when you remove the intra-month spikes that retraced, like a long term resistance. That is the third item. It sits at 1190.

The last two items mark the momentum in the Index. The RSI at the top of the chart is running very hot. A reading over 80 shows strong momentum when it is on a monthly chart, and that is what we have seen in the Index. Rather than being an overbought signal it is a sign of strength. And it has been higher than this for longer. The MACD at the bottom of the chart gives some perspective here. It is higher than it has been in 16 years, but it is still far short of the peak in 2000. there is room to move higher.

Semiconductors may be on the last legs of a move higher. I do not know, no one does. But there is still room for that leg to move a lot higher before any indication of a reversal. Wait for confirmation and enjoy the ride.

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