Saturday, January 14, 2017

SWKS Ready for Breakout on Daily and Weekly Charts

Earlier this week, a Presidential Advisory Panel issued the "Report to the President Ensuring Long-Term U.S. Leadership in Semiconductors."  The report focuses on the status of the US Semiconductor industry and serious threats to that industry being posed by policies emanating from China.  In the executive summary section, the report warns of fundamental weakness in the industry due to technological limitations and rapid expansion in the semiconductor market, then went on to state, "Now a concerted push by China to reshape the market in its favor, using industrial policies backed by over one hundred billion dollars in government-directed funds, threatens the competitiveness of U.S. industry and the national and global benefits it brings."

The report reaches the conclusion that, "...only by continuing to innovate at the cutting edge will the United States be able to mitigate the threat posed by Chinese industrial policy and strengthen the U.S. economy. Thus, the report recommends and elaborates on a three pillar strategy to (i) push back against innovation-inhibiting Chinese industrial policy, (ii) improve the business environment for U.S.-based semiconductor producers, and (iii) help catalyze transformative semiconductor innovation over the next decade. Delivering on this strategy will require cooperation among government, industry, and academia to be maximally effective."

It is against this backdrop of increasing pressure on the semiconductor industry as a whole and the specific threats to the US industry from China that we turn our attention to one of the major US semiconductor companies with a strong international presence, Skyworks Solutions, Inc. (NASDAQ: SWKS).  The stock is poised for a breakout (in either direction) on both the daily and the weekly charts.

SWKS Weekly Chart
For this analysis, we'll start with the weekly chart since that puts everything in perspective.  Looking at price action alone, the stock started a parabolic upward impulse that included 5 well-defined sub-waves, ending Wave-1 on the weekly the week of 1 June 2015.  From there, a Wave-2 correction retraced 61.8% of the impulse pattern, and possibly completed in July 2016.  I say "possibly" because the current pattern on the weekly chart is not conclusive with respects to the start of a Wave-3.  The next move will likely provide that insight.

Volume on the weekly has consistently declined, and combined with the price action, the likelihood continues to increase that we're looking at a coiled spring in the final stages before a major breakout.  (Remember, a breakout can be either up or down.)  The On Balance Volume line is now flat, and when we look at the RSI(9) Oscillator on the weekly chart is converging into an apex that confirms the coiled spring interpretation.  All signs on the weekly point to a breakout in the short term.

SWKS Daily Chart
There's virtually no disagreement to the coiled spring assessment coming from the daily chart.  There are converging trend lines all coming into focus within the next few days, so some type of breakout appears imminent.  Notice the consistent slope from the three upward sloping trend lines.  The dashed red upward sloping line started out as a support line with five touches in that capacity before it was broken and became a resistance line.  (It's current role as resistance is the reason I show it in red.)  Two additional lines parallel to that one form the current support channel, and we can see the strength of that channel in the short term.  

Now look at the resistance lines.  That lower resistance line actually extends out to the top of the peak in December 2015.  There are four clean touches of that line, and two additional touches that extend the full channel up by about a point.  Again, the resistance trend lines appear as strong as the support trend lines.  From a Wyckoffian perspective, this is certainly building sufficient cause to support a strong breakout.

At first glance, we see a warning sign from that strong red volume bar on 12 January.  When we examine the candle, however, we see that the volume was all demand, and that demand came into play on a bounce off the lower support line.  In fact, it rebounded above the upper support line and closed near the high of the day.  That's a major rejection of price and the strength was confirmed in yesterday's price action.

The RSI(9) Oscillator is showing major strength along the lows, and the highs are confirming price action.  There's no weakness in evidence in the RSI(9).  On Balance Volume is also following a gradual upwardly sloping trend line.  This is signalling that we have more strength to the upside than we do to the downside.

The conclusion we reach is that SWKS appears ready to break out.  While the charts are strongly suggesting an upside breakout, naturally we need to be prepared for either.  A long entry on any of the support touches starting 5 January would have been strong plays.  Unfortunately, they don't allow us to trade retroactively!  Instead, we need to seize the opportunity to play what emerges from here.

If entering long, I'd prefer to enter along one of the two support lines that are forming our channel.  If we get a pullback to that either line and then rebound, I'll take that entry.  The action on the 12th and 13th suggest we may get one more test of that support line before the breakout, if the breakout is to be to the upside.  I'll watch for that test and if it occurs on weak volume, I'll enter long.

On the flip side, I'd prefer to enter a short position on a rejection off a test of the resistance line.  Again, if we test that line on weak volume, I'll enter short there.  What we are hoping to setup is a situation where we can enter on the inner support or resistance line with a stop just beyond the outer stop or resistance line.  Either of those conditions (assuming we read the volume and price action at time of entry correctly) will setup the best reward to risk ratio we can obtain from this setup.

A less desirable entry will be on a breakout above resistance or below support.  If volume confirms, we'll take it since the two lines have converged to the point where the stop will still be relatively close, however we'll be watching closely for a better entry setup if one manifests.

Happy Trading.

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