Should SOXX (semiconductor sector ETF) fail to backfill today’s gap & then some by the 4pm close, it will have put in an Island Cluster Reversal topping pattern as discussed in yesterday’s semiconductor analysis video. SOXX and/or SOXS are under consideration as an official short trade although two things are giving me pause at this time:

  1. The proximity to the primary uptrend line off the Dec 24th lows
  2. The fact that neither QQQ nor XLK have made impulsive breakdowns and/or solid daily closes below their comparable primary uptrend lines.

As such, I’m passing this one along as both a potential trade setup as well as an unofficial trade idea for a short entry on SOXX at current levels. Island Cluster Topping patterns have a fairly high success rate of playing out for a major top/trend reversal. Even if that does not prove to be the case here, I can say that SOXX offers an objective short entry with an attractive R/R as one can short SOXX here (or go long 1/3rd a position of SOXS) with a stop anywhere from the mid-point of the Island Cluster up to slightly above the top of the pattern. That would limit any losses to about 3-5% while providing a gain potential of 3x-10x or even more, depending on how the charts develop going forward.

SOXX daily April 26th

SOXX daily April 26th

With QQQ & XLK (tech sector) still very solidly entrenched in an uptrend & yet to breakdown, it might be best to only take a partial (1/2 or 1/3rd) position here, bringing SOXX to a full position on an impulsive break and/or close below the primary uptrend line, assuming that QQQ & XLK have both also broken below trendline support at that time. As Island Cluster Reversal patterns tend to come at major tops, I’m not overly concerned with any near-term price targets on SOXX at this time although my minimum swing target, again if all of the above breakdowns/sell signal end up triggering, would be the 198-190 area.

For those that don’t want to risk jumping the gun, as the rally off the Dec lows has been plagued with false/failed sell signals, I will continue to monitor the semis closely & should we get an even higher-probability sell signal which still offers an objective entry, I will likely add SOXX and/or SOXS as an official trade in which case exact price targets, suggested stop(s) and other trade parameters will be included.