Chip sector's gains are fading, but charts say bulls may just be resting up for a big rally

By Tomi Kilgore The SOX chart is showing a bearish technical divergence pattern that has tended to precede big rallies Charts suggest that semiconductor stocks are enduring a "time correction," that will be resolved eventually with another rally. There are some technical signs that on the surface that suggest chip-sector bulls may be running out of steam, and that it wouldn't take much for bears to take control of the trend. But looking a little deeper, bulls appear to be taking a breather as they gear up for a big push higher next year. Previous similar technical makeups, while rare, indicate that the next leg up could last deep into 2026, and perhaps even accelerate in the latter half. But past behavior doesn't always repeat, so investors should keep a close eye on the charts. The message of chip-sector weakness is coming from what chart watchers refer to as bearish technical divergence, which is when prices continue to trend higher while a widely followed momentum indicator starts trending lower. For the PHLX Semiconductor Index SOX, prices are still making higher highs, as the Oct. 29 record close of 7,327.93 was followed by an even higher record of 7,467.49 on Dec. 10. The SOX is made up of 30 stocks of semiconductor manufacturers and companies that provide related equipment and services. It is tracked by the iShares Semiconductor ETF SOXX. But the Relative Strength Index, which many technicians use to gauge the speed of price movement, has fallen from a close of 70.39 on Oct. 29 to 65.62 on Dec. 10. That lower high in RSI came after it had already fallen from a peak of 81.62 on Oct. 6 - RSI readings above 70 imply an overbought technical condition - which was the highest reading since the 82.07 print on Jan. 14, 2021. Overbought readings occur when rallies exceed historical norms. On Wednesday, the SOX closed at 7,204.37 and the RSI was at 55.46. Basically, the charts are warning that momentum is waning, and each price gain for the "SOX" is taking more out of bulls. Ari Wald, head of technical analysis at Oppenheimer, said high RSI readings, even when they are in overbought territory, indicate that price is accelerating, while bearish divergences indicate price is decelerating and at risk of reversing course. However, Wald wrote in emailed comments to MarketWatch that he believes divergences are more compelling "if there's additional evidence that warns of a reversal, for instance, if price is moderating at a key resistance level and losing relative strength." Currently, Wald doesn't believe that's the case for the SOX, as he sides with the "positive trend and bullish relative strength the [semiconductor] industry has exhibited." Keep in mind the Wall Street axiom that there's nothing more bullish than a record high, and the SOX has reached multiple record highs despite concerns that an artificial-intelligence bubble may have started the process of deflating. By relative strength, Wald was referring to how much better the SOX has performed relative to the broader market, as it ran up 44.7% in 2025 through Wednesday, while the S&P 500 index SPX advanced 17.9%. Wald believes the RSI's pullback only shows that the chip sector is undergoing a "time correction," which he described as the removal of "prior excesses" with prices moving sideways for an extended period. That allows technical indicators, such as moving averages, to catch up to prices. Meanwhile, it looks like that has already happened, and then some. The SOX's 50-day moving average, which is a closely followed short-term trend trackers, has recently climbed the furthest above its 200-day moving average - a key long-term trend tracker - than it has in years. And it has made similar moves only a few times in the past 30 years. The 50-DMA was 24.2% above the 200-DMA on Dec. 11, the most since it reached that level in mid-February 2021, according to a MarketWatch analysis of FactSet data. The only other times in the past 30 years that the 50-DMA was more than 24% above the 200-DMA was from Jan. 22, 1999 to April 19, 1999 - it peaked at 33.4% above on March 2, 1999 - and from Dec. 31, 1999 to June 29, 2000 - it was as much as 55% above on April 12, 2000. Here's where the current technical makeup is similar to those prior occurrences. A month before the last time the 50-DMA was more than 24% above the 200-DMA, the SOX's RSI had reached an overbought extreme on Jan. 14, 2021 (see above), then made subsequent lower highs even as prices made higher highs to a then-record close on April 5. Then following a brief "time correction," the SOX resumed its rally to post a 41.2% gain for 2021, which included a 21.1% fourth-quarter surge. The SOX did suffer a bear-market 35.8% plunge in 2022. But that selloff didn't start until nearly a year after the 50-DMA had peaked above the 200-DMA during a time of bearish technical divergence, similar to what's happening now. And after RSI reached an overbought extreme of 84.89 on Nov. 23, 1998, RSI started trending lower while prices kept rising, and the 50-DMA rose well above the 200-DMA. After another "time correction," in which the SOX was little changed for the first several months of 1999, the SOX started taking off in early June. It rocketed 101% in 1999, including a 41.2% climb in the fourth quarter of that year. Meanwhile, the next period when the 50-DMA was far above the 200-DMA, during the first half of 2000, was not only marked by lower highs in RSI, but also lower highs in price. That was the sign that the dot-com bubble was bursting. Again, keep in mind that the SOX had peaked in March 2000, about a year after the SOX exhibited a similar technical makeup as it is now. Those examples suggests the SOX can still rally quite a bit for quite a while. But keep an eye out for those lower price highs. -Tomi Kilgore This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal. (END) Dow Jones Newswires 12-26-25 0908ET