Fabbing Semiconductors for a Trade

SMH, the semiconductor stock index does not contain Apple but its major holdings are very dependent upon Apple’s orders. As Apple goes, for the most part, so goes the index.  And with Apple reporting after today’s close I thought I should get this post out a bit early as I think with as many eyes and ears as there are on their forward guidance, I expect we may see a wild swing in the direction of the market’s take on the news.

The busy chart of SMH below is a mixture of bullish and bearish arguments so trying to position ahead of any move is foolish, in my opinion. Let price action lead us to the highest probability outcome. The bullish case shows the (red) 200 day moving average in the initial stages of turning positive; RSI momentum in the upper pane is in the bullish range; on balance volume in the lower pane is in a strong uptrend from the Sept bottom and a 50/200 moving average golden cross occurred earlier this month.  

best bay area financial planning investment advisor 4-26-16 - smh

The bears are pinning their hopes on a couple of key points. Firstly, it may be hard to see but in the past few weeks we have formed a double top with price failing each time it reached the $55.55 area.  Finally RSI momentum has created negative (bearish) divergence with price indicating a pause or correction is likely to occur. A breakdown from the neckline projects to an initial target a piddly 4% lower. If that level does not hold, a second and more significant target of ~10% lower is a good possibility.

If you focus your attention to the center and left side of the chart you will see that over the past 18 months we have had two prior occurrences of topping patterns combined with bearish momentum divergence. They lead to more than a 19% and 24% drop from peak to trough. It’s important to remember and not get too excited about jumping ahead that bearish divergences are not a sell or short signals in and of themselves but they are caution flags and definitely should not be ignored.

While the current price action in SMH warns of a corrective decline ahead, the other possibility is this topping pattern morphs into a bullish consolidation flag (on a break and confirmed close above $55.55) suggesting there could be a lot more upside from here since the overbought condition has unwound. Either way, I think Apple will be the catalyst for a nice setup, regardless of whether it turns out to be a bullish buy or bearish short.

Stay tuned.