With the sharp drop in risk assets in the first quarter, we also saw a sharp ‘oversold bounce’ or ‘bear market bounce’ over the past few days. This has brought semiconductor stocks, as represented by the Market Vectors Semiconductor ETF (NYSEARCA:SMH), back to a level on the charts that offers plenty of short-term technical resistance. This could push the SMH ETF lower again for a trade.
The broader risk assets market structure has drastically changed from January into late February. All the chart chasers were whistling past the graveyard in January into the first half of February. This quickly changed in late February as risk assets crashed and volatility spiked.
By many ‘classic’ definitions we now find ourselves in both a bear market as well as an economic recession.
Although many traders salivate at the though of ‘shorting the market’ in bear markets, historical data suggest that most bears actually lose money in bear markets. Why is that? It is largely a function of the volatility and more specifically, the ultra-sharp oversold rallies we tend to see in bear markets. These rallies, which usually just lead to lower highs, are so ferocious that they stop most bears of their short-side bets.
To wit, the rally in risk assets over the past week or so has been notably sharp, but it has now also reached a level of technical resistance where another leg lower could soon emanate from. For perspective let’s first look at the long term, logarithmic chart of the semiconductor SMH ETF.
SMH ETF Stock Charts
Here we see that the rally over the past decade has largely taken place within a well-defined channel, the upper end of which was pierced in early February. This is also where we saw peak momentum.
We have seen a sharp mean-reversion move lower in recent weeks. But given the overshooting move of the trend, it is now also likely we test or even pierce below the lower end of the longer-term channel.
On the daily chart we see that the SMH ETF in the first half of March began to break below its 2019 up-trend as marked by the two parallel lines. The lower end of which at the time also lined up with the red 200-day moving average.
After reaching historic oversold readings in mid March, SMH began a sharp bear market rally along with the broader stock market. Over the past few days the SMH ETF reached the low $120s, which corresponds with simple horizontal resistance that previously acted as support. This area is also just within a few points of the red 200-day moving average, i.e. previous support could now act as resistance for some time.
Trading the SMH ETF
Active investors and traders could look to short SMH around the $115 – $120 area (yes, given the high volatility here, we need to give a wider range for entry) with a next downside target in the $105 – $110 area.
Any strong bullish reversal from here, particularly one that pushes the SMH above $125 on a daily closing basis, would be basis for a stop loss.
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