Technical analysis – Semiconductor Strength in semiconductors to continue October 4, 2021 431

  • The supply crunch for semiconductors has driven record sales and profitability across. Charts indicate an upside that broke the 5-year high. Furthermore, the rebound from Mid-2019 shows the strongest record growth for 2 years straight.
  • Global sales of semiconductors may experience slight correction to the 5 years high support level near 20% after a slight drop in the month of September. The move was also replicated on the Philadelphia Stock Exchange Semiconductor Index.
  • Technical Analysis shows that majority of the semiconductor stocks are exhibiting key reversal signals at the support region. Wave analysis has reveals a majority of the counters are in potential end of their corrections. Therefore, a potential rebound is brewing.

The semiconductor sales worldwide have seen a huge jumped with growth rates breaking the 5-year high in 2020

 

The imbalance of supply and demand of the semiconductors is set to cause further price increases. Taiwan Semiconductor is the first to announced the 20% hike in prices in August 2021. With the complexity and sophiscated manufacturing of the semiconductor chips together with COVID-19 lock down last year has further disrupted the manufacturing process. This has caused severe backlog in supplies and it is expected to continue well into 2Q22.

 

From the chart shown, expect some drop of the global sales to 20% region in the short-term before rebounding as the month of September has shown slight decrease in growth rate after breaking the 5 year high by 2%. The correction in global sales growth is in tandem with the Philadelphia Stock Exchange Semiconductor Index (Fig 2a), where a potential rebound will happen after a correction.

Despite the ongoing contraction and possible correction in the technical price structure, longer-term wave analysis indicate a strong bullish run as wave (3) of the intermediate wave is ongoing. Currently, the minor phase of wave 1-2 of the larger wave (3) has been completed and the sub-leading diagonal wave ((i)) is part of the sub-wave 3 of the minor phase. In other words, the intermediate wave (3) will be embarking on a long journey of a strong bullish upside in the longer-term period.

 

However, there is one crucial factor to consider. The psychological support at 2,750 must hold. If it is broken below, the rate of probability of sub-wave 3 of the minor phase will cease and the sub-leading diagonal wave ((i)) will turn into an ending diagonal.

Although price action indicates a bullish pin-bar on Friday above the 200-day moving average, the upside remains corrective with prices facing a tough sell-off at 3,400. Furthermore, SOX index has crosses below the 22 and 63-day moving average.

 

Potential key rebound remain at the support zone at 2,765-2,850.

Nvidia Corp has shown strong upside in March this year after a three-month ranging period. Unlike other chips companies, Nvidia is set to face another round of large correction after prices hit a high at US$230.00 region. The rejection of 161.8% extension level of the previous pennant indicates a weaker than expected rebound as pennant target are normally at the 200.00 Fibonacci extension level. To confirm the correction, the stock has closed below the resistance turned support at US$208.75 and Ichimoku indicator has shown signs of slowdown after Senkou-Span A has close slope below, the candle closing below both the Tenkan-Sen and Kijun-Sen and lagging span breaking below the candles.

 

Short-term rebound will be seen after last Friday close with a bullish dragonfly doji. However, US$220.00-US$228.00 is seen as a strong contender for a sell-down. Only by breaking above US$240.00 within a month then we will see the return of the bullish upside.

 

 

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About the author

Profile photo of Chua Wei Ren

Chua Wei Ren
Technical Analyst
Phillip Securities Research Pte Ltd

Wei Ren specialises in Technical Analysis and has 11 years of experience in studying classic technical price action. He also study and research extensively on Elliott wave theory, Dow Theory. He believes that history plays an important role in how the market is reflected in the future.

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