Chips correcting

At Tricio we like to look at charts in order to gauge market sentiment and investor action.

We looked at the computer semiconductor sector in a few blogs in 2024 (11 November 2024 - https://www.tricio-advisors.com/post/chips-on-the-rise-again, 17 September 2024 - https://www.tricio-advisors.com/post/chips-with-everything) and in our regular research publications. The sector is catching attention this week as the narrative of ‘software vs. hardware’ is coming under some pressure.

The idea has been that chips are the frying pans and shovels of the new California Gold rush. At the end of the day, a lot of frying pans and shovels are sold in a gold rush, even if the search for gold (big profits and productivity gains for AI users, in this case) may disappoint. Instead of ‘safe as houses’ investors have been betting on ‘safe as chips’ it seems. This is under pressure just now though as big spending plans by AI and data centre oriented firms are being questioned by investors. A pullback may well offer investors a chance to ‘buy the dip’ again, but we watch these closely as frothy markets can have deeper than expected pullbacks.

The SOX (Philadelphia Semiconductor Index as a proxy for the sector) chart below is a short-term look at the current dip (weekly chart, semi-log with 13 and 50-week moving averages). Watch the 13-week moving average on this correction (near 7,333) as support, given that the bounce from the Trump tariff tantrum last April has seen this moving average draw out buyers on two occasions when approached. A sustained drop below this average would leave the 50-week moving average attracting near 5,886. Long-term line support is near 4,000, not expected to be tested any time soon but…

If dips draw out buyers at the 13-week moving average again then the focus may return to the upside with new highs then in the sights. A deeper correction to the 50-week moving average could lead to a few quarters of sideways trading, which will blow off the froth from some of the shares in the index.

AMD is one of the big sector sliders today (weekly chart below) and it looks like an attempt to ‘fill the gap’ to the blue line/50-week moving average near $165 may follow. Very short-term support ahead of this may be found at $195  and then $186 (chart low/highs). Consolidation should be followed by a resumption of the bull trend in time, but see if buyers step up on tests of support.

The short-term chart of NVDA below (weekly semi-log with 13 and 50-week moving averages below) shows that two trendlines are under the cosh this week. A drop below this will put the focus on the 50-week moving average near $160 next, with the next trendline support level to watch just below $100. Again, we are not looking for such a big slide, but the uptrend has been consolidating for a few months now (distribution in classic chart analysis terminology) and this process may extend to lower prices and for some time. This should be followed by ‘accumulation’ which will see demand pick up. Right now, see if prices trend in a ‘lower lows’ manner, hopefully this will be followed by ‘higher highs’ after demand picks up for resumption of the bull trend here as well.

Gerry Celaya

Chief Strategist