Wednesday, October 7, 2009

Semiconductors: A Technical Perspective

Identifying a potential top in this powerful uptrend has been harder than nailing jello to the wall. Although I'm fairly adept at technical analysis, my ability to forecast price direction isn't nearly as good as what I'd like it to be, which is undoubtedly why I prefer higher probability option trades such as condors, naked puts, etc...

Suppose I'm of the opinion that last week's sell off is a sign of more weakness to come. If I wanted to start searching for potential bearish plays I'd consider the following in trying to stack the odds in my favor:

1. Find a relatively weak sector or stock
2. Enter a higher probability bearish strategy such as an OTM call spread
3. Scale in

Of the various sectors I follow, Semiconductors have begun to show some chinks in the armor.

Take a look at the weekly chart (click image to enlarge):
[Source: EduTrader]

26.50 was a strong support level between 2004 and 2008. Once broken, the SMH took a swan dive towards the mid-teens. Now that it has been successful in retracing all the way back up to its breakdown point, one would assume there is a plethora of overhead supply which should make it tough for the SMH to continue its rapid ascent.

A quick glance at the daily chart gives a more refined perspective as to what has transpired recently..
[Source: EduTrader]

1. Slowing Momentum- Each successive breakout has experienced diminishing follow through showing a lack of strength from the bulls.
2. The large selloff experienced by the market on Oct. 1st resulted in a break of support and the 50 MA.
3. Higher volume accompanied the sell-off showing large participation in that day's selling.
4. The MACD is showing divergence, further verifying the slowing momentum mentioned earlier.

Based on the above, a technician could make a pretty good case for more weakness to come within the semis. The obvious caveat emptor is the fact that the market is been a veritable freight train disregarding each and every sign of a top thus far.

Next post I'll review a bear call spread on the SMH.

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