Micron Tech and the Selling in Semiconductors

In the big scheme of things, the pullback into oversold territory on Tuesday may turn out to be a minor event for the Market Vectors Semiconductor ETF (NYSE: SMH).

The fund is still rangebound, trading between intraday highs and lows that were established in mid-February, for the most part, as the ETF consolidated in the wake of a rally to its highest level in more than six months. But if the selling on Tuesday is actually a resumption of the profit-taking that took SMH lower from its recent highs, then there’s every chance that high probability traders will be able to begin scaling in to the fund in the second half of the week.

SMH has been trading in bull market territory since mid-January, pulling back sharply on two occassions since in late February and again in early March, and yielding multiple-day rallies that returned the ETF to short-term overbought levels. Note that these previous pullbacks took SMH deeply into oversold territory before reversing – three consecutive oversold closes in the first pullback and four such finishes in the second.

As such, additional weakness in SMH may be a prerequisite before any major response to oversold conditions occurs. Looking under the hood at the individual stocks of the semiconductor sector, there are stocks like Micron Technology (NASDAQ: MU) and Analog Devices Inc. (NASDAQ: ADI) that are as oversold or more so than SMH. Shares of MU have traded down to new, two-week lows for two out of the past three days to earn 7 out of 10 ratings, one point below our “consider buying” category. The stock has a positive edge of over half a percent heading into Wednesday’s trading.

Analog Devices has closed lower for five out of the past six trading days to finish short-term oversold for the first time in nearly a month. Down more than two percent ahead of Wednesday’s open, shares of ADI have a positive edge of just under half a percent and neutral, 6 out of 10, ratings.

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David Penn is Editor in Chief of TradingMarkets.com