If the broad market finds a near-term bottom, the semiconductor sector should also rebound, and a leveraged chip sector ETF has significant upside for a quick short-term buy.

The strong action in the US stock market on Tuesday came as a surprise, as there was little bullish news that the financial press could use to explain the price action. The prevailing opinion seems to be that the further signs of a weakening economy will spur Fed Chairman Ben Bernanke to say something dramatic on Friday.

Of course, from a technical perspective, any news is a distraction because if it is significant, the market usually reflects it well in advance. There has been some short-term technical improvement with Tuesday’s close, and it suggests that we should see at least a test of last week’s highs, if not a rally to stronger resistance over the near term. To support this view, the major averages will need to surpass Tuesday’s highs either Wednesday or Thursday.

The semiconductor sector has been especially weak since the May highs, and the combined analysis of a leveraged long and short semiconductor ETF suggests a potential contra-trend trading opportunity.


Click to Enlarge

Chart Analysis: The chart of the Spyder Trust (SPY) shows last Friday’s close at $112.64, which was just above the prior closing lows of $112.26 and $112.29. There is initial resistance at $118.21-$121.20, which was last week’s high.

  • The 50% Fibonacci retracement resistance from the early-May highs is at $123.68 with the 61.8% resistance at $126.87
  • Calculating from the early-July high, the 50% retracement resistance is at $122.93
  • The McClellan Oscillator shows a positive short-term formation, as it dropped from +116 to -129 before turning higher Tuesday. It is now back above the zero line and a move above resistance at line a would signal a further rally
  • SPY has short-term support at $115-$115.25 with stronger support in the $114.30-$114.50 area

The Semiconductor HOLDRs Trust (SMH) closed up 3.8% Tuesday on average volume with next strong resistance at $29-$30. The 38.2% retracement resistance is at $31.

  • The more important 50% retracement resistance is at $32.12 with the downtrend (line b) at $33.80
  • The relative performance, or RS analysis, has indicated that SMH would be weaker than the S&P 500 since May, as it has been in a downtrend, line c
  • Through last week’s lows, SMH had dropped over 26% from the May highs, much worse than the S&P 500
  • The daily OBV has started to form lower lows in June, and the downtrend (line d) is still intact
  • There is initial support now at $27.30-$28

NEXT: Top Semiconductor ETFs for Short-Term Trading


Click to Enlarge

The Direxion Daily Semiconductor Bull 3X Shares (SOXL) was up 15.3% Tuesday on the highest volume in over two weeks. There is first resistance at $26.76 with stronger resistance at $29.86.

  • The 38.2% retracement resistance is at $37 with the 50% resistance level and the downtrend, line a, in the $42-$42.80 area
  • The on-balance volume (OBV) has turned up but is still well below its declining weighted moving average (WMA) and its downtrend, line b
  • There is minor support now at $24.20-$24.50 with stronger support in the $22.90-$23.40 area

The daily chart of the Direxion Semiconductor Bear 3X Shares (SOXS) shows a sharp reversal Tuesday, as it was down 15.6%. Using the decline from the August 9 high to the August 15 low, there are some interesting Fibonacci targets.

  • If the current decline is equal to this prior decline, then measuring down from last week’s high gives you a Fibonacci target at $76.50, which also corresponds to the 61.8% retracement support level
  • There is short-term support now at $88 and extending down to the $83 level
  • The daily OBV is still clearly positive, as it is acting stronger than prices, and is well above its rising weighted moving average. Volume was not heavy on the decline
  • The OBV broke through resistance, line d, ahead of prices in late August
  • SOXS has initial resistance at $100 with stronger resistance in the $105 area

What It Means: The short-term action of the McClellan Oscillator suggests that a short-term market low is in place. To abort the bottoming formation, it would take a drop below the lows of the past three days in several of the major index ETFs and the 1111-1123 level in the September S&P 500 e-mini futures. The futures were down almost ten points an hour before Wednesday’s opening.

On a further rally, the initial target for the Spyder Trust (SPY) is $121.20, and I would not be surprised to see a rally to the $122.93-$123.68 area.

At this point, the technical evidence suggests a move back to and possibly above last week’s highs before the rebound from the August 9 lows is over.

How to Profit: There are no signs yet that the Semiconductor HOLDRs Trust (SMH) or the semiconductor industry group is bottoming, as the RS analysis is still negative.

However, if a short-term low is in place, the Direxion Semiconductor Bull 3X Shares (SOXL) has significant upside potential for a quick trade.

Aggressive traders could go long at $24.36 with a stop at $22.44 (risk of approx. 7.9%). Cancel the order if $26.60 is hit first or if the order is not filled by noon ET on Thursday (August 25). Sell half the position at $27.90 and raise the stop on the remaining position to $24.36.

Related Articles
  1. Investing

    How ETFs May Save You Thousands

    Being vigilant about the amount you pay and what you get for is important, but adding ETFs into the investment mix fits well with a value-seeking nature.
  2. Mutual Funds & ETFs

    3 Fixed Income ETFs in the Mining Sector

    Learn about the top three metals and mining exchange-traded funds (ETFs), and explore analyses of their characteristics and how investors can benefit from these ETFs.
  3. Chart Advisor

    Agriculture Commodities Are In The Bear's Sights

    Agriculture stocks have experienced strong moves higher over recent weeks, but chart patterns on sugar, corn and wheat are suggesting the moves could be short lived.
  4. Investing News

    Top Tips for Diversifying with Mutual Funds

    Are mutual funds becoming obsolete? If they have something to offer, which funds should you consider for diversification?
  5. Professionals

    Top Stocks to Short, Go Long On to Beat the Market

    A long/short portfolio can help weather a variety of market scenarios. Here's how to put one together.
  6. Mutual Funds & ETFs

    Top 4 Asia-Pacific ETFs

    Learn about four of the best-performing exchange-traded funds, or ETFs, that offer investors exposure to the Asia-Pacific region.
  7. Stock Analysis

    The Biggest Oil Producers in Asia

    Learn which Asian countries deliver the most crude oil to market, and discover what companies are the biggest producers in each country.
  8. Mutual Funds & ETFs

    Top 3 Japanese Bond ETFs

    Learn about the top three exchange-traded funds (ETFs) that invest in sovereign and corporate bonds issued by developed countries, including Japan.
  9. Stock Analysis

    The 5 Biggest Russian Oil Companies

    Discover the top Russian oil companies by production volume and find out more about their domestic and international business operations.
  10. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  1. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!