The COVID-induced global shortage of microchips caused the VanEck Semiconductor ETF (SMH) to triple in 18 months.
This year, the rally has returned…
The race to embrace all things AI has led the market to bid up stocks that can cash in on the boom, benefiting SMH.
Stocks like NVIDIA (NVDA) and Advanced Micro Devices (AMD) represent around 23% of SMH’s holdings. And they have tripled and doubled, respectively, since January.
However, after hitting fresh highs, SMH is facing short-term resistance.
So today, I want to see what’s in store for this highly watched sector.
Bursting Higher
On the chart below, you can see where SMH bottomed out in October last year after the COVID rally ended. That fall represented a massive 67% drop from SMH’s November 2021 all-time high.
As momentum slowly turned positive, SMH started to rally once more…
VanEck Semiconductor ETF (SMH)
Source: e-Signal
SMH’s rally coincided with two bullish signals…
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The relative strength index (RSI) rose from oversold territory (lower grey dashed line) and up through resistance (green line). There, it gained traction in the upper half of its range.
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The 10-day moving average (MA, red line) broke above the 50-day MA (blue line). Both then tracked higher.
SMH made a series of higher lows. That formed a strong ascending trendline (red line) – another classic bullish pattern. Be sure to notice SMH’s steady climb of higher highs (‘A’ through ‘D’)…
When we last checked in on SMH on March 16 (red arrow), it had just retraced from one of those higher highs at ‘B.’
At the time, we were looking for the RSI to remain in its upper band. We also wanted to see if the 10-day MA would accelerate above the 50-day MA. Those would be signs that SMH could continue rallying.
The next test for SMH would then be to make a new higher high at what would then become ‘C.’
And, as you can see, that is how things panned out.
Take another look:
VanEck Semiconductor ETF (SMH)
Source: e-Signal
After retracing from ‘C,’ SMH’s rally faced pressure due to the RSI returning to the lower half of its range.
Only when that momentum turned positive did SMH test and hold its long-term trendline. And SMH’s rally was able to resume.
SMH’s burst higher up to ‘D’ came off the back of NVDA’s mega earnings results that saw it hit a $1 trillion valuation.
Yet these fresh highs – within 5% of its late-2021 all-time high – show that SMH has run into short-term resistance (orange line).
So what am I expecting from here?
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Avoid False Moves
After such a strong surge, it’s not uncommon for a stock to take a breather…
SMH has stalled at resistance right as the RSI reversed and fell slightly (red circle) from overbought territory (upper grey dashed line).
But for SMH to retrace, we need to see the RSI make a decisive move down.
If the RSI just moves sideways, then SMH could trade sideways as well before trying to make a fresh high.
The other thing I’m watching is our MAs.
The 10-day MA accelerated above the 50-day MA. But now it looks to be slowing down and may have peaked for now.
If the RSI breaks lower and the 10-day MA rolls over, then SMH could soon be trading back below $140.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Mailbag
One reader chimes in with their thoughts about One Ticker Trader’s recent month…
Larry, I just read your June edition of One Ticker Trader, and I just wanted to let you know that I agree with you on not forcing a trade. I like your patience, and if I have to wait for a winning opportunity, then I will. It’s worth it.
Some traders that I have been with in the past would promise so many trades every month, and I would get a bunch of losing trades because of that. It’s no fun watching your money go out the door. Just give me the potential winners. I’ll wait. Thanks for all you do, Larry.
– Robert M.
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