Weakness in Chip Stocks Is Creating a Buying Opportunity

Recent news that Apple Inc. (AAPL) is planning to use its own chips in Mac computers beginning as early as 2020 has many investors interested in the semiconductor industry for the first time in months. In this article, we take a look at the charts that will be of specific interest to active traders and investors alike over the months ahead. (For more, see: The Industry Handbook: The Semiconductor Industry.)

One of the most popular products that is used by investors for gaining exposure to semiconductors is the VanEck Vectors Semiconductor ETF. Fundamentally, this exchange-traded fund comprises 26 holdings and has total net assets of approximately $1.1 billion. As the name of the fund and the topic of this article suggest, the fund seeks to track the most liquid companies in the semiconductor segment and is based on market capitalization and trading volume. The portfolio is made up of both domestic and U.S.-listed foreign companies.

Taking a look at the chart below, you can see that the fund is trading near the combined support of two major ascending trendlines and its 200-day moving average. Based on the tenets of technical analysis, traders will be expecting these support levels to continue to influence the price just like they have done consistently over the past two years. Based on the chart, traders will most likely buy near current levels, set their targets near the swing high of $115 and set stop-loss orders below $95.87 in case of a major shift in the fundamentals. (For more, see: Why Chip Stocks Will Keep Rising.)

According to Bloomberg, Apple's custom processors have recently been manufactured principally by Taiwan Semiconductor Manufacturing. The recent decision to replace Intel chips confirms that other suppliers are able to produce powerful and competitive chips at scale that serve Apple's needs.

Taking a look at the chart below, you can see one of the strongest trendlines found anywhere in the public markets. Notice how bulls would enter positions on each pullback toward the dotted line and how the 200-day moving average (red line) provided added downside protection for long-term traders who wanted to ensure that they are not whipsawed out of their positions. The proximity to the major support suggests that this is a good entry point for the bulls and could trigger a rise in momentum over the coming few weeks. Stop-losses will likely be placed below either the trendline or $39.94, depending on risk tolerance. (For more, see: Are Red-Hot Semiconductor Stocks Top Heavy?)

[Learn how to develop a trading plan based on chart patterns in Chapter 5 of the Technical Analysis course on the Investopedia Academy]

Despite the Apple news, the price of Intel is trading within a strong uptrend and is a good barometer of the strong underlying fundamentals that exist in the semiconductor space. With the continued advancement in technology and changes in product lines, Intel will undoubtedly adjust course and be front and center in whatever comes next.

Taking a look at the chart below, you can see that Intel stock is trading within a bullish step-like pattern, and the rising long-term moving average suggests that the uptrend is just starting to gain momentum and could signal the early days of a major shift higher. It will be interesting to see how the company adjusts over the months and years ahead and whether the 200-day moving average will continue to provide support on major pullbacks. (For more, see: The Sell-Off's 5 Big Bargains.)

There has been a lot of hype around the semiconductor sector over the past several days, and given the strength of the uptrends shown in the charts above, it appears as though the recent dip toward key support levels is providing an excellent buying opportunity. The lucrative risk-to-reward setups are providing clear trading signals, and it wouldn't be surprising to see stocks in the sector bounce higher over the coming weeks and months. (For more, see: Top 5 Semiconductor ETFs.)

Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.