Chart of the Day – $SMH Breakout? More like $INTC

by Enis June 4, 2013 10:55 am • Commentary

So I’m hearing a lot of chatter today about the new breakout in SMH, which is already up more than 20% so far in 2013.  Here is the 1 year chart:

1 year daily RSI chart of SMH, Courtesy of Bloomberg
1 year daily RSI chart of SMH, Courtesy of Bloomberg

A few things I don’t like about this breakout:

  1. The breakout is only occurring from a resistance level that only represents a few weeks of price action, which means that it’s a much less significant breakout as a result (fewer market participants transacted at that level).  The breakout above 36 in mid-April was a more meaningful breakout after a 2 month consolidation period, and was a better breakout setup.  
  2. The momentum, as measured by RSI, has been declining over the past month (shown in the lower panel), and is still relatively weak on today’s breakout.  
  3. The best area of support is around the $36 level, from where SMH broke out in April.  That’s a long ways away from the current stock price, with very minor support in between, another unappealing aspect of this setup.

The main driver of the breakout in SMH today is INTC’s strength.  INTC has been on a tear in the last 3 months as well, but it has had a much cleaner breakout this week:

1 year daily RSI chart of INTC, Courtesy of Bloomberg
1 year daily RSI chart of INTC, Courtesy of Bloomberg

INTC’s chart shows a much cleaner breakout, breaking strongly through a greater than 1 month consolidation period, and doing it on a stronger RSI reading than SMH.  It’s also a more obvious impulse move.

In short, I wouldn’t touch SMH on its breakout here.  I don’t like INTC here either, though it does get interesting from a technical perspective if the stock gets back to the $24.50 level.  But there are many fundamental reasons why I’m not a buyer of INTC (slated to earn less in 2015 than it earned in 2010), despite the recent technical strength.  So I’m just a spectator for now.