Stocks that benefit from artificial intelligence (AI) have seen their share prices rally massively this year.

Nvidia (NVDA) and Advanced Micro Devices (AMD), for example, have more than tripled and doubled, respectively, since January.

However, I want to concentrate on one of the lesser-watched players in this semiconductor sector, NXP Semiconductors (NXPI), today.

When we checked in on NXPI in late May (red arrow in the chart below), its initial rally had faltered. But it was showing promising signs that buying momentum was reemerging.

And we suspected it could be set to rally…

So let’s see how that panned out – plus what we can expect from here…

Breaking Above the Moving Average

After falling 45% from its December 2021 peak, NXPI bottomed out in October last year.

NXPI then developed a bull pattern. It made a series of higher lows (‘B’ and ‘D’) and higher highs (from ‘A’ to ‘C’), as you can see on the chart below…

NXP Semiconductors (NXPI)

Source: eSignal

Changes in buying momentum drove the swings between these peaks and troughs…

NXPI rallied up to ‘A’ and ‘C’ when the Relative Strength Index (RSI) rose, showing that buying momentum was increasing.

And it retraced back down to ‘B’ and ‘D’ when that momentum slumped.

NXPI’s rally from that recent higher low at ‘D’ coincided with the RSI rallying (red line) out of oversold territory (lower grey dashed line).

That rally continued with the RSI promisingly breaking up through resistance.

Adding to the bullish sentiment, NXPI had only just then started trading above the longer-term 50-day Moving Average (MA, blue line).

When I last wrote about NXPI, we were looking for the RSI to gain traction in its upper band. And we needed to see the 10-day MA (red line) break above the 50-day MA and accelerate higher for further evidence of NXPI’s next up move.

The next test for NXPI’s rally would be to make a higher high at what would eventually become ‘E.’

And that is how things panned out…

Take another look at the chart:

NXP Semiconductors (NXPI)

Source: eSignal

After breaking out to fresh highs, NXPI is now trading at its highest level since February last year.

However, the strong buying momentum driving NXPI’s rally has recently pushed the RSI close to overbought territory (upper grey dashed line).

And in doing so, it is potentially locking in that high at ‘E.’

So what am I looking for around here?

Testing Overbought Level

When the RSI tested this overbought level (orange circle) and reversed last month, NXPI also turned lower.

That retracement lasted until the RSI formed a ‘V’ and rallied off support (green line).

NXPI then resumed its rally. And the RSI tracked higher in the upper half of its range.

If that initial RSI reversal pattern from June repeats here, then NXPI could also go through another retracement…

The key will be what happens around support. A break below could see NXPI’s pullback develop into a bigger down move.

The other thing I’ll be watching is our MAs.

As you can see, the 10-day MA is still accelerating above the 50-day MA. And both are bullishly tracking higher.

If the 10-day MA rolls over and starts tracking down toward the 50-day MA, that will give further weight to any potential down move.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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