Tuesday, January 08, 2008

Semiconductor bounce

One of the most overlooked sector hammerings in recent months has come in the semiconductors. The semiconductor HOLDRs (SMH) have shed 26% from their July highs compared to 27% in the much hyped financials.

Yesterday's late afternoon challenge by the bulls in the broader market should see some initial good will Tuesday morning (Futures are up a tad). This could provide a longside opportunity in the SMH. The 60-min intraday chart shows a decent capitulation following the gap from $30.75, with prices stabilizing in $29.25-29.75 range.

The coming week could see a nice counter rally opportunity back to gap at $30.75, with the potential for follow through (based on the health of the broader indices) to the 62% Fib retracement at $31.75.

The initial risk is about $0.50, but this could be reduced to around $0.25-0.30 if one got a fill at $29.25.

On the option front; $22.50 February 16th calls at $7.10 from the Ask give relatively low downside risk with enough time built in for the bounce to unfold. An alternative is the $25 May 17th call at $5.25 which would build in a seasonal advance. The more risk loving might like to take the $30 January 19th call at $0.54, or the $30 February 16th call at $1.03.