“Semi” Short

I use the semiconductor ETF, SMH, as my go to chart when looking at old tech. Semi’s have been around for 30-40 years, most all have excellent business models, pay a dividend and provide strong and growing cash flow.  A look at the current weekly chart of SMH shows price has been in a steep uptrend since the start of the year and has formed a bearish rising wedge. During this ascent, price has bounced off the converging trend lines the requisite 5 times, sits very close to the apex of the wedge all while momentum has formed bearish divergence.  While not a death nail, this pattern is warning of something that has come too far too fast and needs at least a rest, if not more. When combined with the other evidence, I find this a potential compelling short setup.  Any break below the lower rising support with confirmation would be the signal a correction is has started and to expect further downside with a target of about 9 points or 13% below.

Don’t take this post as a suggestion, recommendation or an endorsement to short SMH because there are no guarantees as this, like all patterns can fail. Shorting strong stocks (or most any stock in a bull market) is a great way to lose money if you don’t have a system to manage the position in case you are wrong.  Being wrong is a normal part of investing, staying wrong and losing a lot of money in the process is foolish.

Some struggle with the part about being wrong. You shouldn’t. The best investor/traders I know are wrong between 60-70% of the time but they make a ton of money. Why? Because they have a plan and make sure they aren’t wrong for very long.

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And speaking of failed patterns, right here on this same chart is a great example. From the middle of 2014 through the entirety of 2015 price formed a head and shoulders reversal pattern which warned of lower prices. The downside target if the pattern played out was about 30% below Jan 2016’s low. Anyone that attempted to short this stock without waiting for confirmation would have been wrong and lost a bunch of money. As is typically the case, once a pattern fails it can becomes a powerfully strong investment in the other direction. In the case of SMH, on confirmation of the patterns failure in May, price rose 25% in 5 short months. This is a great example of two important technical analysis tenets 1) never invest in a pattern that has not yet confirmed and 2) do not give up on an investment if a pattern fails as it is likely to give you very strong gains in the other direction.