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This Semiconductor Stock is Selling Off

Break of support should lead to further weakness

My indicators are giving very strong sell signals this week, unchanged from last week. The S&P 500 index fell nearly 7% from July 26 to Aug. 5, pushing it into oversold territory very quickly.

However, as you can see in the chart below, the S&P has enjoyed a decent snap-back rally over the past few days. It is now back above its 50-day moving average (red line), but it is still under resistance in the 2,950 area.

Daily Chart of the S&P 500 Index (SPX) — Chart Source: TradingView

The index found support around the 2,820 level this week, but if it fails to hold above its 50-day moving average, I wouldn’t be surprised to see another trip down to the 200-day moving average near 2,800.

Trading the Trade War

The trade war is turning into a currency war, as China has now devalued its currency, the yuan, in order to offset the impact of the new U.S. tariffs.

Remember, China is a communist country, and it doesn’t play by the rules. It seemed that it was moving toward a more free-enterprise system not that long ago, but it is now moving back toward true communism again. I think that’s why they rejected the trade deal that was on the table, and I’m no longer sure that we are going to be able to settle this trade war at all.

From a rational point of view, it would be better for China and everyone else if it opened up its markets to the U.S. and tried to make a deal. But that’s simply not their political philosophy, as we are finding out.

And because China is willing to endure more economic pain than the U.S., that’s giving them the upper hand in the trade negotiations. I think the market is starting to realize this as well, and that’s why it has been acting the way it has recently. Traders are now starting to price in a trade war that lasts for much longer than expected.

Semiconductors Slump

One sector that has been made especially vulnerable to the trade war is the semiconductors. Wall Street analysts have already been slashing their expectations for semiconductor stocks, and they are penciling in contractions in profits and margins.

One stock that in this space that looks particularly weak is Cohu, Inc. (NASDAQ: COHU), which provides semiconductor testing equipment.

The company reported disappointing earnings this week, and the stock fell below a critical level of support at $14, as you can see in the chart below.

Daily Chart of Cohu, Inc. (COHU) — Chart Source: TradingView

I strongly expect that this level will act as resistance going forward, which makes this a great opportunity to take a bearish trade. The stock is also below both its 50-day and 200-day moving averages, which should keep the momentum to the downside for now.

With that in mind, I recommend you…

Buy to open the Cohu, Inc. (COHU) Nov. 15th $12.50 Puts (COHU191115P00012500) at $0.80 or lower.

InvestorPlace advisor Ken Trester brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.


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