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The semiconductor sector has been struggling for approximately nine months. The Philadelphia Semiconductor Index (SOX) peaked last June at just over 750. That was the highest it had been since January 2001.
Over the last nine months, the index has fallen approximately 20%. The index fell 25% from June through mid-August and then rallied 23.5% from mid-August through early December. Then it fell over 19% from early December through early February. It has since bounced back approximately 10% in the last few weeks.
One stock that has pretty much followed the pattern of the SOX is Analog Devices (NASDAQ: ADI). The stock peaked in early June and then fell through mid-August. One differentiation between Analog Devices shares and the SOX is that ADI peaked in mid-October rather than early December. Analog Devices has rallied recently, but now is facing resistance from its 50-day moving average.
We also see that the 10-day RSI is right at the 60 level. That area has been the site of a couple of peaks in the stock price over the last ten months. The slow stochastic readings didn’t quite reach overbought territory this time around, but they did make a bearish crossover recently.
On the weekly chart, we see another layer of resistance from the stock’s 13-week moving average. The astonishing thing about the weekly chart to me is the angle of the 13-week moving average. Look at how sharp the descent has been.
We also see that the 52-week moving average is now moving lower. That is something that had not happened since the last bearish phase in the overall market. Even if the stock rallies all the way up to the $57.50 area, it will still face pressure from the 52-week moving average and the upper rail of the downward-sloped channel.
Despite the downtrend in Analog Devices shares, the sentiment remains relatively bullish. The short interest ratio is only 1.58 and the number of shares sold short has fallen in recent months. The analyst ratings show 16 “buy” ratings and 13 “hold” ratings at this time. What is really surprising is that over the last seven months, there have been four upgrades, one downgrade and two new initiations. What the upgrades and falling number of shares sold short tell us is that the sentiment is moving toward a more bullish stance despite the downward trend in the stock and the sector.
With Analog Devices facing resistance from its 50-day and 13-week moving averages, I would look to short the stock at a price in the $51 to $53 range and would target a move down under $42. There is minor support in the $41.15 area as that was the site of the lows in October 2014.
As far as a stop-loss mark, I would look to exit the short position should the stock move above the $56.50 level, but I might also look to get back in should the stock stall at the upper rail of the channel and the 52-week moving average.
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