High-profile chipmakers like Nvidia (NVDA) and Taiwan Semiconductor (TSM) have enjoyed a great start to 2024.
But it’s just not the chipmakers getting bid up by investors.
One Dutch company that supports this sector, ASML (ASML), is also sitting on some impressive gains.
ASML manufactures the super high-tech equipment that chipmakers use for high-end chips. (TSM is one of its clients.) Now ASML is up around 27% above its January low with its market cap approaching $350 billion.
That valuation is now potentially looking stretched for the short term. Let’s see if it could be due for a pullback…
Three Clear Phases
The 50-day Moving Average (MA, blue line) in the chart below shows three distinct phases for ASML this past year.
First, there was a rally up to its peak in July. Second, it retraced through September. Third, ASML’s huge rally got underway in October. Now ASML is up around 57% from its September trough…
As the chart shows, ASML bottomed out and rose into October. That coincided with our momentum indicator, the Relative Strength Index (RSI), rallying from oversold territory (lower left orange line).
Then the RSI tested resistance (green line) and failed to break through. So ASML drifted into the end of October.
However, the RSI finally broke into its upper range in November as ASML gapped higher.
The 10-day MA (red line) crossed sharply above the 50-day MA. The steep angle of that crossing showed the strength of the rally. And then both MAs continued to track higher.
After that initial strong move, though, a diverging pattern warned of a potential pullback (right upper and lower orange lines).
And as the chart shows, that’s how things played out.
The RSI did manage to briefly pierce support (green line). Yet it was unable to gain any traction. Take another look here…
This action enabled ASML to consolidate. (Note: ASML briefly traded intraday below the 50-day MA. But then it bullishly closed above this level and rallied.)
Finally, the RSI surged into its upper band, underpinning ASML’s strong recent move. And the 10-day MA accelerated above the 50-day MA once more.
ASML’s Q4 revenue and earnings exceeded analysts’ forecast. On top of that, the jump in ASML’s new order book out to 2025 saw investors pile into the stock.
After gapping higher, though, the RSI is showing that ASML could be overbought.
So what can we expect from here?
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Remember that with mean reversion trading, we’re looking for stocks that have overshot in either direction in the short term and aim to profit when they reverse back the other way.
And that is what I’ll be looking for around here…
If the RSI continues to retrace lower toward support (green line), that could pull ASML lower and provide the setup for a potential short trade.
If the 10-day MA converges back toward the 50-day MA, that would be further evidence that the reversal is playing out.
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