The US market managed minor gains on Monday but should get a boost on the opening as news from China indicates the government is willing to take new action to revive their slowing economy. The Hang Seng Index gained over 2% and the Nikkei was also higher on an upgraded economic outlook in light of the weekend elections.
European markets are higher as are the stock index futures. The Nasdaq 100 was up 0.34 % Monday but the Select Sector SPDR Technology (XLK) was only up a fraction. As the market continues to grind higher, it becomes more imperative to identify both the leading and lagging industry groups while focusing on the risk.
Many are expecting the technology sector to play a role in leading the market higher. The earnings, so far, from the tech sector have been disappointing with Google Inc. (GOOG) and Microsoft Inc. (MSFT) reporting much weaker earnings, though Texas Instruments (TXN) was more upbeat. Of course, we get Apple's (AAPL) earnings after the close today.
- In the middle of July, the SMH was up over 22% in 2013, which was 5% better than the SPY.
- Both were much stronger than the XLK, which was up only 11%.
- Then in the past week, SMH has come under pressure as it is now only up just over 19% for the year.
- It is very close to dropping below the yearly performance of the SPY, which could be significant.
- The XLK is still 10% lower, and it needs to move above the May high at 11.6% to keep its uptrend intact.
- The daily chart shows the move through resistance at $39.28, line a, last week.
- SMH subsequently reversed and is back to its 20-day EMA at $38.51.
- The monthly pivot is at $37.85 with the quarterly pivot at $36.80, which is just above the June low of $36.57.
- The relative performance formed lower highs last week, line c.
- The RS line has just dropped below the support at line d, which is a sign of weakness.
- This makes the action over the rest of the week important.
- The on-balance volume (OBV) did confirm last week's highs but has now dropped below its WMA.
- There is important OBV support at line e.
- There is initial resistance now in the $39 area with the quarterly R1 resistance at $40.07.
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Intel Corp. (INTC) lowered its sales projections last week as it is not profiting from the growth in mobile devices.
- INTC peaked in early June at $25.98, which was just below the 2nd quarter's R3 resistance at $26.02.
- The stock has already dropped over 12% from its high as the 3rd quarter pivot support at $23.54 was violated on last week's earnings.
- The daily uptrend, line a, is now at $22.50 with the 61.8% Fibonacci support from the November 2012 lows at $21.81.
- The relative performance formed a negative divergence, line b, at the June closing high.
- The drop below the uptrend, line c, on June 27 confirmed the divergence.
- The RS line now shows a clear pattern of lower highs and lower lows.
- The OBV has also dropped below the support at line d with longer-term support at the uptrend, line e.
- The move above the initial resistance at $24.43 is needed to reverse the downside momentum.
Taiwan Semiconductor Manufacturing (TSM) is an $86.19 billion semiconductor company that peaked at $20.30 on May 9. Its EPS last week was a bit better than expected but the stock gapped lower last Thursday.
- The April lows at $16.48 were broken last Friday.
- The rally in early July was a classic rebound within a downtrend as it stalled at the quarterly pivot at $18.41 and the 50% retracement resistance.
- The relative performance peaked in February and formed a lower high in early May.
- The RS line shows a solid downtrend (line f) and has now plunged through support at line g.
- The OBV is holding up better, though it also formed a negative divergence, line h, at the highs.
- The support at line i was broken in late June and a drop below this low would be even more negative.
- The weekly OBV (not shown) also formed a negative divergence at the May highs.
- There is initial resistance at $17.14, which was the late June low.
What it Means: Some of the semiconductor stocks are acting much better than INTC and TSM but one of the strongest, Xilinx Inc. (XLNX), was the most oversold S&P stock as of last Friday. It is in a high-risk buy area and looks vulnerable to a pullback.
Advanced Micro Devices (AMD), another semiconductor stock, dropped 13% on its earnings last week. Though some other semiconductor stocks are still holding up, if you have exposure in this sector, I would consider becoming more defensive as the industry group does not typically bottom until the fall.
How to Profit: No new recommendation
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.