The microchip shortage during COVID now seems like a distant memory…
Back then, demand ramped up for things like new cars and electrical goods – right when the semiconductor industry was already facing its own disruptions.
This supply/demand misbalance saw the VanEck Semiconductor ETF (SMH) triple in a little over 18 months.
However, that huge boom unwound last year…
By the time SMH bottomed out in October 2022, it had about halved from the start of the year. But since then, SMH has been steadily grinding higher.
SMH is now testing a key level. So today, we’ll see what’s in store from here…
Topping Out as the RSI Peaks
On the chart below, you can see SMH’s massive downtrend last year.
SMH made a series of lower highs at ‘A,’ ‘B,’ and ‘C.’ The longer-term 50-day moving average (MA – blue line) trended lower too.
Take a look…
VanEck Semiconductor ETF (SMH)
Source: eSignal
Two common bearish patterns followed those peaks at ‘A,’ ‘B,’ and ‘C’…
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The Relative Strength Index (RSI) fell through support (green line) and then tracked in the lower half of its range.
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Each down move was then confirmed with the 10-day MA (red line) breaking below the 50-day MA.
When we checked out SMH on September 8 (red arrow), the RSI was tracking down toward oversold territory (lower grey dashed line). And we were looking for a potential bounce.
But although SMH rallied briefly, the RSI remained stuck in its lower band.
SMH’s rally began only after the RSI broke up through resistance and gained traction in the upper half of its range in early November.
Then, that up move was confirmed by the 10-day MA breaking back above the 50-day MA.
Take another look at the chart…
VanEck Semiconductor ETF (SMH)
Source: eSignal
Since then, you can see a repeating pattern in SMH’s uptrend.
SMH topped out at ‘1’ when the RSI peaked in overbought territory (upper grey dashed line) and started retracing lower (red line).
After the RSI briefly dipped below support, SMH rallied again. This time it peaked at ’2’ (a higher high).
Next, the RSI reversed again and tracked lower from overbought territory.
Now the RSI is right back along support (red circle). And at the same time, SMH is testing its own short-term support (orange line).
So what can we expect from here?
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A Potential Third Leg
The immediate action around the RSI will be key.
If the RSI breaks higher from here, then we can also expect SMH to rally off support. The next test for SMH’s rally would be for it to take out its recent high at ‘2.’
Beyond that, the next leg of a longer-term up move would need SMH to create a new higher high at what would become ‘3.’
For that to happen, the 10-day MA needs to accelerate above the 50-day MA again.
But ultimately, it all hinges on the RSI…
If the RSI breaks lower through support and remains there, then SMH’s current pullback still has further to go.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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