You Were Ready For The Semis, And They Didn't Disappoint

The SPX ($SPX.X | Quote | Chart | News | PowerRating) had a lower high and lower low, 1124.37 vs. the previous day, but did have a higher close at 1134.41, +0.4%, while the Dow ($INDU | Quote | Chart | News | PowerRating) was +0.2% to 10,395. NYSE volume expanded a bit from Monday to 1.37 billion, with the volume ratio 64 and breadth just +289. Toward the end of the quarter, it is not unusual to see this more frequently as money is more apt to go to the Generals' largest holdings, so there can be a concentration of volume in a smaller amount of stocks.

It was a trader-friendly day with some defined entries for the major indices, but our two focus sectors were the leaders, as the semis had a big day with the SMH closing at 36.80, +3.0%, and the brokers (XBD) finishing at +1.4%. You should not have been surprised at volatility in either the semis or the brokers because you had anticipated it.

The SPX remains in a 10-day flag pattern consolidating the 18-day gain from 1076 to 1142, so it is in a favorable technical pattern if it holds for the "gang" to break it out into the June month end. One of the Generals' major holdings, (MMM | Quote | Chart | News | PowerRating), was taken to new all-time highs again yesterday, closing at 89.62.

Many individual semis didn't have a significant volume increase above their average volume whereas the SMHs did, trading 25.5 million, the most up-volume since 05/10. Why take individual stock risks when you can get long/short exposure to the semis through the SMHs? Also, it is much easier for hedge funds to cover shorts.

For example, large price moves on less volume in the semis were (TER | Quote | Chart | News | PowerRating) +5.6% on 91% of its average volume, (NSM | Quote | Chart | News | PowerRating) +3.7% on 83%, (KLAC | Quote | Chart | News | PowerRating) +3.6% on 87% and (NVLS | Quote | Chart | News | PowerRating) +3.1% on 78% of its average volume. (AMD | Quote | Chart | News | PowerRating), +4.0%, and (MU | Quote | Chart | News | PowerRating), +1.0%, did trade with 50% or more above average volume. (BRCM | Quote | Chart | News | PowerRating) broke out of its trading range since January on 30% above its average volume and was +5.0%.

Another price/volume thread from yesterday was the telecom sector as there is a conference going on, so many of the smaller hedge funds are back trading the low-priced stocks in that sector, like (JDSU | Quote | Chart | News | PowerRating), (CIEN | Quote | Chart | News | PowerRating) and (LU | Quote | Chart | News | PowerRating). It would be more interesting if they break (JNPR | Quote | Chart | News | PowerRating) out of the 21.80 - 20 box right at its 200-day EMA.
 

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For Active Traders

You were ready for the semis, and they didn't disappoint, as the (SMH | Quote | Chart | News | PowerRating) gave us an excellent trade with sequence and symmetry. I have included two charts to highlight the trade progression.

Yesterday's 35.67 low set up an RST long pattern after it took out Friday's 35.81 low. Those of you that have learned the RST anticipated that going into Tuesday's trading. You had also anticipated the Fib extensions of the last significant leg up (five-minute timeframe) from 35.81 to 36.50, and as you can see, the 1.272 Fib extension of the XA leg is 35.62. You also knew that 35.67 was in the three-month 2.0 standard deviation band zone, which is 35.25. You had an RST setup with sequence.

The RST setup entry was above 35.75, and this ran to 36.23, which is the . 786 retracement to 36.50, the 240 EMA and the 1.0 volatility band, which was 36.27. It was also the 10:00 a.m. ET bar, which is a key reversal period in first-hour trading. This was a +1.3% move from the 35.75 entry.

The contra move from 36.23 went to 35.82 vs. the .618 retracement to 35.67 of 35.88. Price resumed the direction of the open (90% - 60% Rule). The initial opening run to 36.23 was on good volume, while the contra move down was on light volume, so if you missed the RST, you got a .618 retracement entry above 35.89. If you didn't take either one, and you have my strategy materials, then you had better review them again.

It was trend up after the .618 retracement entry that ran to 36.50. This was the 1.272 Fib extension of the leg down to 35.82. It was also the 1.28 volatility band level, in addition to the 480 EMA (equivalent to the 20 EMA on the 120-minute chart). This sequence was enough to initiate a retracement to 36.15, the 60 EMA (20 EMA on a 15-minute chart), and was also the .50 retracement to 35.82 from 36.50. Price then advanced to 36.74 with the 2.0 volatility band at 36.81 and the 1.618 Fib extension of the 36.50 - 36.15 leg at 36.72. The SMH didn't hesitate more than two bars, then went on to make a new intraday high of 36.88, +3.3% from the 35.75 entry and closing at 36.80, +3.0% on the day. Great travel range.

Net net, in Tuesday's commentary, you knew the SMH was down -8.2% in eight days from 38.83 - 35.63 and that some percentage retracement up wouldn't surprise you. I also said that it is a decision level zone for the Generals in both the semis and brokers, not to mention they were both sectors you were focusing on. It was simply an excellent sequence day in the SMHs and individual semiconductor stocks.

All of this material and much more will be covered in the seminar this coming weekend, both live in New York and on the Internet. If you played the 1,2,3 higher bottom in the (SPY | Quote | Chart | News | PowerRating)/futures, it was also a decent trade. The SPY had entry above 112.86 and ran to 113.81, where it closed. The ESU4 entry was above 1125.50, and it ran to 1135.25.

The (QQQ | Quote | Chart | News | PowerRating)s also gave you a 1,2,3 higher bottom above 36.15, which ran to 36.69, and if you were very aggressive early, you took the 1,2,3 lower bottom with entry also above 36.15. Either way, you had the same entry.

The positive divergence in the SMH was evident right after the RST entry on the first bar, and then the contra move/Fib retracement to 35.82, which was obviously a higher low relative to the previous day's 35.67 low. On the other hand, the SPY/futures took out the previous day's low on the contra move down to 112.67, and the 1,2,3 higher bottom entry wasn't until the 11:55 a.m. or 12:00 p.m. bar.

The XBD made a similar Fib retracement as the SMH, but did take out the previous day's low on the first two bars. However, the XBD gave you a 1,2,3 higher bottom entry on the 11:25 a.m. bar.

Today's Action

Buying weakness is the better side, as the Generals, barring overt news, won't let the SPX get away too much on the downside going into their six-month and quarter-ending-June report card. Any upside out of the flag pattern will provide short opportunities after any mark-up. Some more names for your focus list because of their current position are (QCOM | Quote | Chart | News | PowerRating), (BRCM | Quote | Chart | News | PowerRating), (BA | Quote | Chart | News | PowerRating), (LLL | Quote | Chart | News | PowerRating) (XOM | Quote | Chart | News | PowerRating), (ESV | Quote | Chart | News | PowerRating), (SWK | Quote | Chart | News | PowerRating), (APOL | Quote | Chart | News | PowerRating), (MERQ | Quote | Chart | News | PowerRating) and (EBAY | Quote | Chart | News | PowerRating).

Have a good trading day,

Kevin Haggerty