Making the case for a chip stock rally

by Michael Tarsala

You’re going to need chips to build anything tech-related, says J.C. Parets, investment adviser and chartered markets technician.

That is one of the reasons he its watching the Philadelphia Semiconductor Index (^SOX) as a leading indicator for other markets, and perhaps the tech economy.

He put together this chart below that makes several bullish arguments for the SOX:

Source: All Star Charts

• The downtrend since late March is now broken, and the index is moving sideways.
• It’s encouraging that the Relative Strength Index, at bottom, was rising while the index fell in late May and early June, helping to mark the downtrend’s end.
• This group had a chance at moving to an uptrend last week, but failed at the 200-day moving average.
• Going forward, the price action is likely to consolidate more, building strength as it does.
• The breakout point — around the 390 level — now appears to be clear.

It also has to be a positive that major chipmaker Texas Instruments (TXN) was one of the few companies to preannounce to the upside this quarter.

All told, Parets makes the argument that chips and other markets may eventually turn bullish.

It’s one more reason not to abandon stocks altogether in the remaining weeks of summer.