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Strength In Semiconductors Is The Key To Setting New Highs In The Stock Market

The Dow Jones Industrial Average (DJI) gapped above its 50-day simple moving averages and has a neutral weekly chart. The S&P 500 Index (SPX) also gapped above its 50-day SMA and has a neutral weekly chart. The Nasdaq Composite (IXIC) is on the cusp of its 50-day SMA and has a neutral weekly chart.

The Dow Jones Transport Average (DJT) is well above its 50-day SMA and has a positive weekly chart. The Russell 2000 Index (RUT) is above its 50-day and 200-day SMAs, which are converged at 2,234,17 and 2,230.64, respectively. This week’s strength is preventing the formation of a death cross.

The Philadelphia Semiconductor Index (SOX) held its 200-day SMA at 3,171.51 on October 12. It’s still below its 50-day SMA at 3,343.89. Its weekly chart remains negative. The SOX is a major warning for the stock market.

If the SOX turns positive the upside is to new highs. The monthly risky levels are 37,751 on the Dow 30; 4,730.17 on the S&P 500; 15,259 Nasdaq; 17,038 on Dow Transports; 2,409 on the Russell 2000; and 3,584 on the SOX. If the SOX can’t lead, the stock market could suffer significant downside pressure.

If you are bullish, buy semiconductors. If not, reduce stock market holdings by 50%.

The Daily Chart for the SOX

Not shown on the chart is a golden cross for the SOX that was confirmed on June 8, 2020. That’s when the 50-day simple moving average rose above the 200-day simple moving average. This was a buy signal at 1,998.62. The chart shows how the SOX tracked its 50-day SMA over the last 52 weeks. The 52-week high of 3,484.18 was set on September 16.

The 50-day SMA failed to hold on September 28 and the 200-day SMA was tested at 3,171.51 on October 12. The rebound from this buy signal is approaching the 50-day SMA now at 3,343.

The monthly and quarterly risky levels are above the chart at 3,584 and 3,637. The semiannual pivot is the highest horizontal lint at 3,079. The lowest horizontal line is the annual value level at 2,424.

The Weekly Chart for the SOX

The weekly chart for the SOX has been negative since the week of October 8. The SOX is below its five-week modified moving average at 3,332.01. The SOX is well above its 200-week simple moving average or reversion to the mean at 1,944.62. The 12x3x3 weekly slow stochastic reading is declining at 63.41.   

Trading Strategy: Buy the SOX on weakness to its 200-day simple moving average at 3,179.10 and add to positions on weakness to the semiannual value level at 3,079. Reduce holdings on strength to the 50-day simple moving average at 3,344.02.

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