Going Long on Synopsys

The semiconductor sector had a strong start to the week with the Semiconductor HOLDRs (SMH) up over 2% on Monday. Synopsys (SNPS), which provides hardware and software technology that helps chip manufactures design and test integrated circuits, is in a good position to benefit from continued strength in the space. Last month, the company reported year-over-year quarterly earnings growth of 32.4% and revenue growth of 14.8%. It has no debt and trades at a 12.8 forward price earnings multiple. The weekly chart shows the decline from the 2007 high to the 2008 low and the nearly 90% rise off the 2008 low to the 2011 recovery high. The Fibonacci retracement levels of these two moves have supplied important support and resistance in the past and are doing so again. The 38% and 62% levels defined a trading range from September 2009 until the price broke out one year later. That provided the momentum for the strong move that took the stock back up to the February 2007 high. The stock was unable to make new highs and attempted to consolidate in a small wedge pattern. Support in the $26.50 area was broken in June and the price fell through its 200-day moving average and back down to the 50% Fibonacci retracement. The solid August earnings report rallied it back up above the 50-day moving average and the 38% retracement level. Another Fibonacci influence can be seen on this chart. The vertical green lines beginning at the 2008 low mark Fibonacci time zones or, simply, the Fibonacci number series in trading days. The last 4 points in the series have marked important bottoms. Other positive technical signs on the weekly chart: stochastic have made a bullish crossover and are above their centerline; RSI is also above its centerline and 21-period signal line and the MacD line is attempting to move higher. There were several positive weekly volume spikes associated with the recent strength, enough to stabilize the decline in the longer-term Chaikin money flow indicator and the accumulation/distribution line. Synopsys (SNPS) -- Weekly Source: StockCharts.com View Chart » On the daily chart below, you can see how the price attempted to hold above the $26.50 level for most of this year. It looked more like a wedge pattern on the weekly chart but here it is a three-month consolidation channel. The breakdown in June was followed by a weak attempt at recovery that retested the confluence of the 50 and 200 day moving averages. That failure formed what would turn out to be the left shoulder of an inverse head-and-shoulders pattern. The head formed when the 50% retracement level was tested and held and recent price action has formed a complex right shoulder A zone of resistance is marked by the 200-day moving average, previous channel support, and the downtrending neckline. The inability to breach this zone of resistance is reflected by a loss of momentum in the RSI and MacD indicators, but over the last four sessions, volume has been above the 50-day moving average of volume. Chaikin money flow is well above its centerline and the advance/decline line is above its 21-period signal average and tracking higher. Synopsys (SNPS) -- Daily Source: StockCharts.com View Chart » The graph directly above shows the 4.1% out performance of SNPS relative to the SMH, which could continue if the semis -- and technology in general -- can gain some traction. The trade is to enter long on a penetration of the $26.30 level and place an initial percentage stop under the head-and-shoulders neckline. The pattern projects a price target the distance from the head to the neckline or just above the 2007-2011 highs.

Going Long on Synopsys

This semiconductor name is in a good position to benefit from continued strength in the space.

Columnist Conversation

CPI Beats Expectations, But Maybe Not the 'Whisper'?

This Holding Lights Up With Strong Earnings

Jobs Report Reaction: Incredibly Strong, But Questions to Ask

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.