ETF Timing: SEMInal Information. What is the semiconductor breakout telling us?

9-15-2010: An ETF Timing Article about what the Semiconductor Index (SOX) is telling us about market timing the S&P 500 and NASDAQ. And an opportunity to PROFIT!

The semiconductor index or SOX is a leading economic indicator and market ETF timing indicatorof sorts, because these days just about everything contains a chip of some kind.  That means that you can judge how the economy is doing and whether it is expanding based on how many of the little non-edible chips are being made worldwide.

So how is the Semiconductor Index of chip makers, the SOX index, doing?

1. The semiconductors peaked when the market did on April 27th, 2010 and has been in a correction ever since.

2. The SOX made a series of 4 important lows all a short distance from each other, including 2 in May, and one in June as well as one in July.  The July low was the lowest.

3. In August, the SOX dropped below all four of those lows (ETF timing SELL signal) and made a brand new low after attempting to briefly stabilize at a slightly higher level than that low.  The slightly higher plateau was formed in mid-August.  

4. The most recent low was made on August 30th and since then the SOX rallied, but first pulled back to test the Aug. 30th low but never reached it, so a HIGHER low was formed, which is further ETF timing evidence confirming the BUY signal.

5. On Sept. 14th, the SOX broke out above the high of 9-3-10, verifying the up trend and the ETF timing BUY.

6. Today the SOX was BELOW the high of 9-3-2010 (330.90) but THEN recovered back above it and closed at 331.64.

7. If the SOX can remain above 330.90 and THEN move through the nearby resistance level of 333.84 (high on 8-18-2010), the rally can continue.

So why does all this matter to the market as a whole?

1. The NASDAQ is highly correlated with the SOX index, so either

    a. The SOX must catch up to the NASDAQ

    OR

    b. The NASDAQ will sell off and catch up to the SOX         eventually.

2. The SPX (S&P 500) is also fairly well correlated to the SOX performance.  It is not as "tight" a correlation, but it is still highly correlated.

CONCLUSION: The SOX will either continue to rally and catch up to the S&P 500 and NASDAQ OR both will sell off.  You may want to wait until the SOX closes or moves ABOVE the resistance of 333.84 before buying.

So what could you do to profit?

If you are bullish about the stock market, get bullish about the SOX.  Index funds like the SMH (semiconductors holders) track the SOX index. 

In the catch-up process you probably stand to make more money in the SOX than in the S&P 500 during the remainder of this rally.  Again, you may want to wait for it to clear the overhead resistance before buying. 

Also, do NOT place this trade if you are Bearish about the market and the most conservative approach would be to buy the SOX ONLY after an SPX (S&P 500) breakout above the resistance level of 1131.23.

And as always set a stop mentally so you know where you will exit.  The potential gain is to 365-370 from here which is about 10% from here, so you could afford to lose up to 5% and you would still have a Reward: Risk of 2:1 (see "Buying Checklist" page if needed).

If you feel uncomfortable with a 5% loss, use a tighter stop. Just realize that if your stop is too close, you run the risk of being out of the trade after a corrective pullback in a Bull move.

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