Semiconductors are the building blocks of electronic devices.
These chips power the computing hardware of smartphones, artificial intelligence (AI), crypto mining… and beyond.
Because of this, chip stocks have been turbocharging the stock market.
Nvidia (NVDA) is one of the biggest leaders in the semiconductor market. It alone has gained 144% this year and added $1.8 trillion in market capitalization.
It’s also responsible for nearly a quarter of the S&P 500’s return this year.
And the VanEck Semiconductor ETF (SMH) that tracks the semiconductor sector is up 39% year to date.
In addition to NVDA, it holds other key names like Taiwan Semiconductor Manufacturing (TSM) and Advanced Micro Devices (AMD).
But there are signs that the momentum behind these chip stocks is stalling.
And one pattern points to a reversal ahead…
Off the Launch Pad
For the past two years, chip stocks have gained as headlines swirled around AI and crypto demand.
The most recent leg of the rally was set in motion late last year. The chart of SMH shows that the launch pad for higher prices emerged last October.
Take a look:
SMH started trading inside of a channel after peaking in July 2023 (see the dashed lines).
Yet the Relative Strength Index (RSI) provided a clue that the price was about to shoot higher.
At “1,” the RSI made a higher low – even though SMH made a lower low in price. That shows that positive price momentum was building.
From there, SMH jumped above the 50-day moving average (MA – blue line). It proceeded to rally 97% into July this year.
But recently, the RSI has warned that a reversal is in store. And a new bearish pattern is emerging…
|
Free Trading Resources Have you checked out Larry’s free trading resources on his website? It contains a full trading glossary to help kickstart your trading career – at zero cost to you. Just click here to check it out. |
Chip Momentum Stalling?
Chip stocks rallied into the summer of this year. But as SMH was hitting a fresh high, a major warning signal appeared.
Let’s zoom in on the SMH chart:
As SMH made a higher high at “A,” momentum was stalling out. The RSI saw a lower high at “1.”
From there, SMH fell as much as 25% from the peak.
The price has recovered some from that decline. But it’s now creating a new bearish pattern to watch.
Let’s take one more look at the chart:
A “head and shoulders” pattern is forming. (The two outside arches represent the shoulders, while the middle arch is the head.)
This pattern is a reliable indicator when an upward trend is ending.
The “neckline” of the head and shoulders pattern sits at the dashed trendline at $200. If SMH breaks below that point, it would complete the pattern.
A move below the neckline would show that SMH is shifting to a downtrend with lower highs and lower lows.
So despite the hype, traders should be careful in this sector of the market.
Chips will keep powering the hardware behind key trends like AI and cryptocurrencies. And there’s no doubt we’ll keep hearing of exciting advancements and innovations in these spaces.
Yet chip stocks may have gotten ahead of themselves for the time being…
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
P.S. Last night, tech investor Jeff Brown unveiled his passion project – an AI tool he’s crafted to spot patterns in the crypto market.
The “Perceptron” locates 60-day windows that can hand you thousands of dollars from crypto moves. Even during the 2022 downturn, Perceptron helped deliver nearly a dozen winners in the midst of the turmoil.
Now, Jeff says it’s back – and better than before.
So if you missed last night’s event, be sure to catch up on the replay by going right here.
This recording won’t stay up for long, so don’t wait…