Silicon Motion Technology Corp. (SIMO)
(9/4/07)

With the SOX index looking to be in recovery mode, and with the comeback in stocks like SNDK, we're looking for short to near-term plays on semiconductors.  We did a Wave Watch for WFR, and are also looking at SIMO to get in on what should be more recovery ahead.

As the daily chart suggests, the $13 drop in SIMO from July 16 to August 16 nevertheless traced out what is countable as a large zigzag pattern.  As the longer-term wave count indicates, this was acceptable as a Wave (4) decline, and the Fibonacci ratios work out well.  The larger wave pattern itself displays the guideline of alternation, with Wave (2) being sideways, and Wave (4) being sharp.  If correct, then the real opportunity in the stock is being offered in a Wave (5) recovery, which would retrace the decline, and post a new high above Wave (3), which should occur between 29.70 and 30.70.  The daily wave labels suggest the formation of a new impulse pattern, with targets for Wave 3 of (5) at either 22.75 or 24.71.  Other areas of upside resistance are indicated.  The stock should not get below 19.32 if this wave count is correct, and we like the stock for an entry while it remains above this.  A 18.35 is support, and a stop can be set below here to limit risk.

For an option play, you might consider the December 2007 $20 Call (symbol MQILD), currently selling for $3.90 with the Delta at 0.67.  

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