Sunday, January 04, 2009

Are The Semiconductor Stocks Turning Bullish?

Above is monthly chart of the semiconductor index (SOX) and as you can see the index is sitting on a very significant support level from 1998. Now just because a market reaches a support level is not a reason to get long because we all know sometimes support levels hold and at other times they fail miserably. What I like to do in my own trading is to look for other reasons to help confirm that the support level has a high probability of holding.

If you look below at the daily chart of the SOX index you'll notice a very common reversal pattern known as an inverse head and shoulders formation, (no this is not something you buy at the drugstore). The fact that this pattern has developed in an oversold condition at a very significant long-term support level leads me to believe that we may see a rally here in the semis.

On Friday the SOX index broke out above the neckline of the inverse head and shoulders formation confirming the pattern. The upside objective is around 283. I'm not looking for a major rally in the semis but I do believe we will see some buying or short covering in the weeks to come. As always we'll see what happens.

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