SMH's Trading on Volume, and Back To Lead?

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Look who returned to run up the market!
And smack it in the last half hour?

The semiconductors, a good indicators of tech, and represented by the ETF, SMH, completed a divergence pattern today, and set a little fire under the Q’s. The semi’s have a way of helping or hurting the overall market and since May of this year they’ve been a real drag.

As you can see in chart 1 below of the Q’s and SMH’s below the Q’s new high in late July was a huge divergence vs. the SMH’s badly lagging rally. When the SMH’s and Q’s then made new swing lows in early August it was telling sign of a very vulnerable market ahead (see red arrows in chart 1).

Now with the SMH’s having tried to break the lows of September 6^th while the Q’s traded much higher there was an opposite divergence (see green arrows in chart 1). To complete it, I like to wait for a confirmed up move by the weaker of the two diverging instruments and that’s what we saw today with the SMH’s trading over their consolidation high around $30 (see yellow line in chart 1).

The implications of this move are that the Q’s, which have managed to hold up without the help of an important market sector’s support may now have it. Taken one step further, a positive trend in the SMH’s should help push the Q’s higher.

 Chart 1: Divergences

The Trend Is  Still Negative

But don’t pop open any champagne in the name of the bulls quite yet. The trend in the SMH, as measured by the 50 and 200 moving averages, is still quite bearish. So pull backs should be expected, and if the Q’s break the trend line from the Aug. lows that down trend could easily reassert itself.

A Closer Look At The Volume

I don’t mean to rain on the SMH’s most excitingly bullish day in months, but I couldn’t help but take a closer look at the seemingly huge volume behind the move by looking at intra-day volume patterns in the SMH and by using HotScans to look for the high volume stocks and the most volatile stocks in the SMH’s top 10 stocks. What I found is interesting.

Look at the 1-min bars and you’ll see massive volume traded in the last 5 minutes (see volume circled in chart #3 at the bottom of this page). Trading on volume this massive will make that closing area very important. Don’t mistake this 5 min bar to be “all of the day’s volume”. Even without that bar the SMH had huge daily volume

Look at the top 10 holding of the SMH as displayed in the HotScans screen shot below labeled as chart 2. This table displays the price and volume for the whole day (outlined in blue) , the Last 30 Minutes of the day (outlined in red), and MOST INTERESTINGLY, the whole day up until the last 30 minutes (this is the in the right most columns labeled as “Previous Per” and outlined in purple).

Chart 2: HotScans (click on image to view entire image)

Here’s what I see…

1. Volume for the day was generally much better than average with the notable exception of INTC which is the largest component of the SMH at about 20%! The second largest component at 19% is TXN. The only other lighter than average volume stock, XLNX is about 5%. I’d feel more bullish if the INTC had better volume.
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2. The most interesting fact is that up until the last half hour of the day, as represented by the right most columns, the only stock with better than average volume was SNDK! For the record, only SNDK began the day above their 50-day moving averages. There may be some bullishness in the fact that the strongest stock coming into the day did have the best volume pattern.
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   The implications of the volume up to 3:30 analysis is clearly displayed in the middle two columns labeled “Last 30 Min”. Here you can clearly see that volume was extremely greater that normal (and these measures account for the time of day!), and the price action with that volume was down hard!
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3. While it would be easy to say this last 30-minute sell off with all the SMH stock trading on volume that was extremely high and price action that was negative, I’ll reserve bullish or bearish judgment. It will, however, be a key area of resistance.

I could easily conclude that were it not for the big volume sell off in the last half hour, 9 of the top 10 weighted stocks in the SMH would have had below average volume for the day. Not as bullish as the SMH daily chart would suggest.

Conclusion

The price action of SMH and its underlying stocks is very encouraging for the bulls in the context of a bearish trend. The bases that many of the stocks and the SMH are breaking out of could easy provide the support that will probably be need in the near term because the momentum of the down trend is very significant.

It is now time to watch the SMH very closely on pull backs. There may be great trading opportunities for trading reversals and breakout trading. I’ll be using HotScans to find the price and volume leaders in the semiconductor group to find these trades. Stay in touch here as I’ll likely post when I find interesting patterns, just as I pointed out leading stocks in a post a few days ago. If you look back you see that 4 of the 8 stocks on that list were semiconductors (ALTR, MXIM, SLAB, MRVL)! I was not surprised to see SMH explode higher today.

Finally, the SMH will serve as a more significant barometer of the health of the Q’s because of the recent divergence pattern. In fact, we may have seen evidence of that today. On a 1- minute chart, the SMH had a divergence pattern that led into the big volume sell off.

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Chart 3: 1-Minute Divergences, and Trading on High Volume In Final 5 Minutes