During the 2020 pandemic, cheap money pushed demand for chip-heavy goods to new highs.
At the same time, the semiconductor industry was trying to deal with supply chain disruptions.
A combination of ramped-up demand and limited supplies caused the VanEck Semiconductor ETF (SMH) to more than triple in just 18 months.
But after topping out at the end of 2021, SMH has shown a different story… Despite some counter-trend rallies, SMH has been steadily falling since the start of 2022.
So today, we’ll see what’s in store for this once, red-hot sector as we scope out potential trades.
Counter-Rallies Within a Downtrend
The chart below shows SMH’s downtrend kicked off when the 10-day moving average (MA – red line) broke below the 50-day MA (blue line) in January.
And the Relative Strength Index’s (RSI) action shows another common bear pattern…
VanEck Semiconductor ETF (SMH)
Source: eSignal
Apart from two counter-trend rallies in March (A) and June (B), the RSI stayed in the lower half of its range (below the green line) for most of SMH’s down move.
But after bottoming out in June and July, SMH rallied again.
The RSI formed a ‘V’ off oversold territory (lower grey dashed line), and SMH rallied off a short-term support level (orange line) at $200.
Then, as the RSI broke up through resistance into the upper half of its band, SMH’s rally gained momentum.
Soon after, the 10-day MA crossed back above the 50-day MA, which further confirmed the emerging uptrend.
But when the RSI pushed up against overbought territory (upper grey dashed line) at ‘1,’ SMH’s rally began to lose momentum.
While SMH made a higher high, the RSI made a lower high at ‘2.’ A change of direction was in the cards…
Once the RSI tracked below support into the lower half of its range, SMH dropped.
VanEck Semiconductor ETF (SMH)
Source: eSignal
Now, SMH is within a whisker of retesting its previous price level at $200. And the RSI is tracking near oversold territory (red circle).
So what can we expect from here?
When a Stock Overshoots
If SMH holds its short-term support level – and the RSI bounces off oversold territory – then SMH could bounce back to $210.
But if the RSI doesn’t bounce or form a ‘V’ – and instead gets stuck in the lower half of its range – then SMH’s downtrend will go further.
In that case, a break below support could provide the setup for a short trade.
But don’t forget – we’re not aiming for the next “big trend.”
Instead, we look for mean reversion trades. When a stock overshoots in either direction, we wait for that stock to rebound the other way to profit.
And with both SMH and the RSI about to test key levels, the potential for a trade isn’t far away.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
P.S. Last night, I shared my urgent warning with traders about an engineered event that’ll shake markets within days…
By next Friday, we could see up to $1 trillion change hands… sending a whole new wave of volatility through the system.
I don’t want any of my readers to be caught flat-footed… because I know how to spin this market event to our benefit. We can turn this situation into one of the most profitable times of the year – using a single ticker.
But to take advantage, you have to be in place early. There’s no time to waste. That’s why I shared all the details – including the name of the ticker – at last night’s briefing.
If you weren’t able to tune in, you can watch the replay right here.
Reader Mailbag
In today’s mailbag, a subscriber to The Opportunistic Trader thanks Larry for another win…
Hi Larry,
My first trade was a win. I want to say thanks. My relationship with The Opportunistic Trader began on April 30, 2022. Today I closed out my first trade with a win! Great work, thank you!
– Clinton A.
Thank you as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at feedback@opportunistictrader.com.