The set-up: Semiconductors – as measured by the VanEck Vectors Semiconductor ETF (SMH) — had a bounce last week off support at $80.74. While they’re coming up to their 50-period moving average, I think they’re going to reverse and give us another pullback.
What I’m seeing: There’s a gap on this chart from $79.48 to $79.01. Based on the down-trending channel for semis, I think we’re in a short-term run up to the top of the channel before we get another leg to the downside.
Eventually we’ll fill that gap; when I look through the stocks in the SMH, many are below that 50-day moving average and some are below the 200-day line. That’s a sign of downward pressure.
The back story: Semiconductors had an amazing run from July 2016 until June 9 when Goldman Sachs released a report questioning tech valuations, which caused a big selloff. There’s a huge engulfing candle still sitting on the SMH chart. The bigger a candle, the more intense you can expect the downtrend, which is why I don’t think we’re done to the downside. When stocks start to fall below the 50 and can’t get above it, it’s not a bullish sign. (It’s different when they’re on an uptrend and trying to get through.)
The play: I use leveraged ETFs to take advantage of moves like this, so I’m long the Direxion Daily Semiconductor Bear 3X (SOXS), the daily triple-inverse semiconductor ETF, with 350 shares from $29.52. My plan is to get out at ??? and I will set my stop at ???
Bonus point: I’ll be monitoring semiconductors this week looking for a support area that will make me want to go long again, watching specific names like Applied Materials (AMAT), Advanced Micro Devices (AMD), Micron Technology (MU), NVIDIA Corp. (NVDA) and Skyworks Solutions (SWKS).
Petra Hess runs PetraPicks.com. She is a technical swing trader and long-term investor in domestic and Canadian stocks and ETFs. She only trades shares, not options. At the time this article was published on RagingBull.com, she had 350 shares in SOXS, but held no shares and had no open orders in SMH or any of the individual stocks named in this article.