The fundamental growth story in Taiwan Semiconductor (NYSE:TSM) is undeniable. But with TSM stock gaining as much as 233% from last year’s low, many are wondering if the best is behind it.
Recent price action is certainly giving would-be buyers pause. The trajectory of its trend just downshifted to neutral, and there’s now a messy trading range to contend with.
While the fundamentals say buy, the technicals say wait. Today, we’ll explore the tug-of-war and identify how to play TSM stock now. While directional trades remain tricky, the options market provides a few ways to increase your odds of success. I’ll share one such high-probability play below.
TSM Stock and the Sector
Stocks exhibit a strong correlation with their sector. If semiconductors are in an uptrend, then it provides a tailwind for TSM. The reverse is true if semiconductors are in a downtrend. Because of this fact, let’s analyze how the VanEck Vectors Semiconductor ETF (NASDAQ:SMH) has been faring using a daily chart.
Ever since bottoming on March 8, SMH has been in recovery mode. A higher pivot low formed on March 25 and was followed by a powerful breakout on the 31st. Importantly, the retest of the breakout zone ($242) held with Wednesday’s rally. Prices are retreating in early-morning trading Thursday, but as long as we remain above the 50-day moving average, the uptrend is intact.
The best-case scenario would lift prices back to the $258 peak and beyond.
Stock is Rangebound
There have been a few key technical developments in Taiwan Semiconductor’s chart that define its current posture.
First, on March 4, TSM stock prices fell significantly below the 50-day moving average. This was the first such breach of the 50-day since TSM bottomed last year, which says something about this correction versus its predecessors. We’ve remained below the 50-day ever since.
Second, the 50-day moving average is now trending lower. This is a function of how long prices have been trending below it and marks one more obstacle for the bullish argument.
Third, the response to the April 14 earnings announcement was bearish. Say what you will about the numbers, but they weren’t impressive enough to bring buyers to the yard. Apparently, the bid-up in price over the past year was sufficient in pricing in whatever earnings growth the company has experienced.
Fourth, with the post-earnings slide, TSM stock is also now below its 20-day moving average.
Throw it all together, and this is a tough spot to buy with conviction. Waiting for prices to return to an uptrend by breaking above the moving averages I just mentioned would pave the way for a bull trade.
The best buyers can say right now is that TSM boasts a compelling growth story in light of global chip demand. And, the stock is offering an 18% discount off the highs.
Two Trades for TSM Stock
When it comes to trade ideas, I see two paths worth exploring. The first is a longer-term bull call spread that banks on an eventual recovery. Using longer-dated options will give TSM stock multiple months to find a bottom and return toward its previous peak. However, to increase the probability of profit, we’ll use strike prices that only require prices to return to $130.
Trade One: Buy the July $125/$130 bull call vertical for $1.05.
The risk is $1.05 and will be lost if TSM sits below $125 at expiration. But if it can push past $130, you’ll capture $3.95 at expiration. Every $1 risked, you stand to gain $4, making this a great risk/reward trade.
The second idea is a shorter-term cash flow play that pays out as long as TSM can stick above $110 for the next month.
Trade Two: Sell the May $110/$105 bull put spread for 70 cents.
The max reward is 70 cents, and the max risk is $4.30. To minimize the damage if wrong, exit if we break the support level at $108.
On the date of publication, Tyler Craig held a LONG position in TSM.
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