The Other Rally That AI Kicked Off

The market has seemingly had an “all-in” approach to AI this year. But not all tech stocks have reacted the same way.

Market giants Nvidia (NVDA) and Advanced Micro Devices (AMD) burst higher in January. And both continue to climb.

Others were initially more subdued – like we saw when we checked out NXP Semiconductors (NXPI) last week. Its rally only started to take off in May.

And today, I want to check out another microchip maker set to capture more of the AI space.

Broadcom’s (AVGO) rally only recently got underway…

Slowly Converging

On the chart of AVGO below, you can see where Broadcom bottomed out in October last year.

It was oversold. But as buying momentum gradually returned (red line), AVGO slowly began to rally.

Broadcom (AVGO)

Source: eSignal

Yet it was anything but a breakout rally.

The Relative Strength Index (RSI) bullishly broke through resistance (green line) and started to track in its upper band. But the very slow climb of the 50-day Moving Average (MA, blue line) shows how feeble that move was.

The other thing you’ll notice is the action of the 10-day MA (red line).

Typically, in a strong rally, the 10-day MA will cross above the 50-day MA at a sharp angle and accelerate higher. This time, the 10-day MA never really made a clear break higher.

Instead, it tracked the 50-day MA closely. And the lines slowly converged before briefly crossing in early May.

AVGO was trading around the same level as its high in January. Any potential breakout rally seemed like an unlikely event.

But the RSI again broke higher into its upper band, and AVGO regained buying momentum. That rally then accelerated sharply in May with news of AVGO’s multiyear (and multibillion-dollar) deal to develop 5G components with Apple (AAPL).

Its earnings beat at the end of that month added to AVGO’s positive momentum.

But the RSI had risen way into overbought territory (upper grey dashed line). So AVGO’s rally started to flatten out.

Take another look:

Broadcom (AVGO)

Source: eSignal

Despite AVGO slowly grinding higher (upper orange line), the RSI has been steadily making lower highs (lower orange line).

Meanwhile, the 10-day MA is converging with the 50-day MA, warning of a potential change of direction.

So what am I looking for around here?

Holding Support

As the chart shows, the RSI has rebounded off support recently (red circle). And what happens next will be key…

For AVGO’s rally to regain momentum, the RSI must continue to hold support and keep tracking in the upper half of its band.

The next test would be for AVGO to take out its July 25 all-time high ($923.18).

That all depends on the action of the RSI… If momentum continues to fall (lower orange line), then ultimately that will drag AVGO lower too.

The RSI breaking below support and the 10-day MA crossing below the 50-day MA will set AVGO up for a pullback.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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