Larry’s note: Welcome to Trading with Larry Benedict, my free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us.
My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’m featured in the book Market Wizards, alongside investors like Paul Tudor Jones.
But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it…
Due to the pandemic, most of the economy is still dealing with broken supply chains and labor disruptions.
However, the semiconductor sector in particular has seen demand far outweigh supply the past couple of years.
So, today I want to revisit this sector to see how things are playing out…
After nearly tripling since March 2020, the VanEck Semiconductor ETF (SMH) ripped 30% higher in just a month (from October to November last year).
As buyer panic gripped the market, SMH ran into resistance at the upper orange line.
After failing to break higher, SMH then transitioned from an uptrend to a sideways range-bound market. Take a look at the SMH chart below…
VanEck Semiconductor ETF (SMH)
SMH bounced off both support and resistance from mid-November into early January 2022 before finally falling lower.
When we last checked out SMH on January 17 (red arrow) the Relative Strength Index (RSI) in the lower portion of the chart had been trending down for over two months.
Having broken down through the RSI’s own support (green line), SMH soon followed suit as it too broke its support level.
That action coincided with two clear patterns from our two moving averages (MA)…
First, the 10-day MA (red line) crossed down over the 50-day MA, confirming a change of direction to the downside.
And second, the long-term 50-day MA (blue line) also rolled over and started heading down – another bearish signal. It marked the 50-day MA’s first significant down move in almost two years.
After the RSI went into oversold territory on January 27 (lower grey horizontal line) and bounced higher, SMH’s share price also rallied… Right up until it ran into and re-tested support at the lower orange horizontal line…
VanEck Semiconductor ETF (SMH)
When a price breaks below support, that level can change into resistance. And that’s what we saw with SMH.
After trying to break through its resistance and failing – locking in a lower high – SMH moved swiftly lower.
With the RSI stuck in the lower half of its range and failing to break above resistance multiple times, SMH continued to fall lower.
In fact, just recently it traded at its lowest level since May 2021.
So, what can we expect from here?
With the 50-day MA and 10-day MA both trending lower, SMH is currently stuck in a downtrend…
SMH’s next target is a previous support level (red horizontal line) that dates all the way back to March 2021 ($224).
While that level would represent a 30% fall from its all-time high, we must remember that it’s almost double the level SMH was trading at during early 2020.
Even while SMH falls, we need to be ready to take advantage of a move in either direction.
And that means keeping one eye firmly on the RSI.
Any bounce out of oversold territory – or a break back above resistance – could provide an opportunity for a quick rebound (long) trade… even if it goes against the major trend lower.
Editor, Trading With Larry Benedict
What are your predictions for the semiconductor sector?
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