Potential Double-top In Semiconductor Sector + Trading Notes

SMH (semiconductor ETF) printed a doji candlestick yesterday with prices moving lower so far today, which helps to the bearish nature of this potential topping candlestick. I'm going to study the charts of each individual component of the sector to get a better read on the group as I continue to be very selective in adding any new exposure right now, long or short, as near-term technical outlook remains unclear. In additional to this potential reversal candle in SMH, this semiconductor ETF is also challenging the June 1, 2015 high so a failure here would put a double-top high in place. Also note the potential, although yet to be confirmed negative divergence forming on the MACD & RSI as the semis begin to roll over from overbought levels on the daily time frame.

SMH daily July 15th

SMH daily July 15th

One thing giving me pause on taking a position in the semis right now is the fact that I don't see any divergences on the weekly chart of SMH & with the few individual semi stocks that I've glanced, I haven't yet noticed any clearly bearish setups. With that being said, I did feel that the developments on this chart were worth highlighting at this time & I will continue to monitor the sector closely for either a convincing breakout to new highs or a failure at or possibly just above that June 2015 high.

My reluctance to add SMH as an official trade also speaks to the fact that the last few weeks has seen the lowest number of official trade ideas posted on the site since I can remember. Other than the fact that I was on vacation last week, I'm just not finding many compelling trade setups with clearly objective entries & attractive R/R profiles. I've have a few inquires from new members lately inquiring how to capitalize (profit) as well as sift through & focus on the important & actionable market developments on RSOTC. As such, I plan to publish some tips on how best to use the site & most effectively profit from the trade ideas but until I get that out, let me just say that official trade ideas are those in which I have the highest degree of confidence.

Official trade ideas, unlike the unofficial trade ideas often posted in the trading room & occasionally on the front page, also list specific suggested entries, profit targets & stops. One thing that I refuse to do just for the sake of keeping up web traffic to the site or trying to provide paying members with a sense that they are getting their money's worth is to keep a continual stream of official trade ideas flowing on the site. Swing trading, as least from my experience with my trading style, has typically been marked by periods of fairly steady & often quite rapid & large gains, followed by periods of relative sporadic, muted gains or even losses as the market consolidates from the previous trend which was often the result of the previous winning streak. Just as you can't squeeze blood (or water) from a stone, you can't extract money from the stock market on a daily basis. I find it best to keep things light until not only the next objective setup in the market, a sector or a stock that you are watching beings to materialize, but also to hold off on aggressively engaging the market until it starts to become clear that move that you have been waiting for is most likely clearly underway but far from over.

For example, those bullish that believe the last two years was just a big consolidation that worked off the overbought & overvalued conditions in a much larger bull market that has now just started a new leg up might be scaling in fairly aggressively, only stopping out once it becomes clear that the $SPX breakout has failed & the rest of the market appears to be headed much lower (assuming that you are positioning for a trend trade). Think of it this way, if you're looking for a continuation of bull market that much more room to run or even just a blow-off top that could spike the markets another 20 - 30%+, why wouldn't you be fully long here with a 8% stop loss as an 8% drop would take the $SPX below the 2000 level, wiping out the recent rally & most likely opening the door to new lows?

Likewise, those bearish could certainly establish a partial short position on the indexes or sectors of their choosing (or select individual stocks), adding only on weakness in the market but NOT continuing to scaling in short if the market continues higher, which will begin to erode the bearish case should it do so from this point. Those bearish but more risk adverse might opt to hold off for a little more evidence that the market is poised to take another major leg down, such as a convincing failure of the recent $SPX breakout, confirmation of the negative divergences on the daily time-frames, failures of key support levels to hold on the next pullback, etc... Again, more on how to best follow & filter the information & trade ideas on the site to come under a separate post.

Jul 15, 2016 1:08pm|Categories: Equity Market Analysis|Tags: |Comments Off on Potential Double-top In Semiconductor Sector + Trading Notes