Rrisk assets globally took a big hit Friday on the back of the United Kingdom’s vote to leave the European Union. Ugly price action in absolute terms and through the lens of technical analysis could be seen across the landscape of equities as well.
One of the visibly nastier bearish reversals was in semiconductor stocks, as represented by the Market Vectors Semiconductor ETF (NYSEARCA:SMH). The SMH ETF dropped close to 6% — led by drops in Intel Corporation (NASDAQ:INTC) and Qualcomm, Inc. (NASDAQ:QCOM) — after giving bulls a hopeful rally the day prior.
Active investors and traders could now look to play the short side in the SMH, which could have plenty lower to go in the next few weeks.
When global growth or political concerns rise and risk assets such as stocks react negatively, correlation within stocks also rises. This might seem obvious, but in times of duress, many market participants seem to forget this and look for “safety stocks” to hide in. However, active investors might find better risk/reward opportunities by leaning against well-defined technical areas of support or resistance, such as what I see setting up now in the SMH ETF.
SMH ETF Charts
On the multiyear weekly chart, we see that this semiconudctor ETF managed in February to hold its 2009 support line, and in recent weeks it continued to show relative strength versus the broader U.S. stock market. As such, until the 2009 support line is broken, large institutional money will likely continue to be a buyer on dips in this space.
But more active types should be aware that last week’s violent bearish reversal marked the chart with a lower high versus the 2015 highs and left a long bearish tail behind last week.
On the daily chart, we see that just last Thursday, the SMH ETF acted in a giddy manner and succeeded in making a daily breakout above its early-June highs. This was publicly celebrated on Twitter by chart-chasers and other momentum players, but by Friday morning, a much different tone had set in as the semiconductor ETF gapped lower. By day’s end, the SMH ETF closed the week at its very lows and also succeeded to break below the yellow 21-day simple moving average, which is often a first sign that a multi-week/multi-month change in direction is at hand.
Active investors and traders should look to short the SMH, buy put spreads of sell out-of-the-money call spreads to play this ETF back toward the low $50s in coming weeks.
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