After a blistering first quarter of 2024, the VanEck Semiconductor ETF (SMH) is facing its first major test for the year.

SMH invests in the semiconductor sector. Its largest holding, Nvidia (NVDA), dominates the ETF (26%). Taiwan Semiconductor Manufacturing (TSM) and Advanced Micro Devices (AMD) account for another 9% and 6%, respectively.

When all three stocks were firing, their combined 41% weighting propelled SMH higher.

But TSM and AMD are both retreating off their recent highs. That leaves NVDA carrying more of the load.

So today I want to see what’s coming next…

A Massive Rally

The chart of SMH below shows how far this sector has advanced in the last year. From its April 2023 low to its March 8 high, SMH gained a massive 102%…

VanEck Semiconductor ETF (SMH)

Source: eSignal

But it hasn’t all been one-way traffic…

From March to May and again from July to October, SMH got stuck in a sideways pattern.

We see this in the 50-day Moving Average (MA, blue line) as it retraced against its overall long-term uptrend.

The Relative Strength Index (RSI) also highlighted SMH’s sideways moves. It bearishly fell back into the lower half of its range (below the green line).

Yet the latest leg of SMH’s rally took off in late October along with the broader market.

That rally coincided with several bullish technical indicators:

1. The shorter-term 10-day MA (red line) crossed and accelerated above the 50-day MA, pulling both MAs higher.

2. The RSI broke back into the upper half of its range. It has predominantly remained there since.

Also, notice some bullish action by the MACD that started in October.

This occurred when the blue MACD line crossed above the orange Signal line and dragged it higher.

That bullish signal developed further. Both lines crossed above the zero (0.00) line, where they steadily ground higher.

Take another look:

VanEck Semiconductor ETF (SMH)

Source: eSignal

But as the chart shows, while SMH was making those higher highs (upper orange line), the RSI was tracking sideways in overbought territory (lower orange line).

This diverging pattern eventually led to SMH retracing from its March 8 high. And the RSI and MACD both recently slipped lower.

So what can we expect around here?

The Next Leg Down

Although the RSI has fallen from overbought territory, it is still tracking in the upper half of its range (above the green line).

For SMH’s recent down move to develop further, we’ll need to see the RSI break down through support.

A sustained move into the RSI’s lower half could see SMH test the $200 level.

We’d then also look for the two MAs to close in on each other (with the 10-day MA crossing beneath the 50-day MA) as further evidence of an emerging down move.

And the major indicator I’ll be watching closest over the coming week is the MACD…

SMH’s peak on March 8 coincided with the MACD line reversing from its high. Then after the MACD crossed beneath the Signal line, both have recently tracked closer together.

If the MACD line breaks lower again and pulls the Signal line down with it, that would likely set off SMH’s next leg down.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict