Semis have had an amazing run, but they’ve reached pretty crazy levels and today’s action feels like the beginning of the end (at least, the end of this run before needing to develop a long base). The past three trading sessions days since Warsh’s Fed comments were interesting. While there was an initial pullback with the rest of the indices, this bucked the trend, gapping up each day (frustrating the crap out of me and, I’m sure, many other bears), and refusing to fall even a tad. The days were grinding sideways and drifting higher in an environment where everything else, including all other tech stocks, were starting to fall apart. I mentioned it in a comment yesterday that I found it unusual and notable that all of the “trending tickers” on Yahoo yesterday were semiconductor stocks.
Usually, this list is a sort of “flavor of the day” list which has a mix of stocks from different sectors, usually in the news for some FDA news, merger and acquisition news, or other company specific sort of reason. But seeing just a hot sector like this set off alarm bells. Everyone was piling in after a run that seemed out of science fiction. I tried to interpret it from the average investor perspective and the only thing that made sense was that this was the last pocket of the market with potential for outsized gains. I understand the logic (if one could call it that). When someone sees something go up day after day and then look at their own stocks and decide “
Here I am owning tech like shmuck when I could be owning semiconductors and gaining 5%-10% in a day!” So they started to sell existing holdings to get on that gravy train. I felt it was only a matter of time and got back in yet again (I had attempted to catch this top a couple times in the past 2 weeks). Of course, the end of the day almost made a fool of me as the stock turned up into the end of the trading day. Then this morning’s action changed everything. It caught the entire sector’s investors flat-footed. We may see some chop and bounce attempts, but I think we will need to test some support levels before this actually bases. Reviewing multiple time frames as these levels I think are important on each time frame.
The June month has five trading sessions left after today, so there is time for this to shape up, and I think there is a decent chance of putting in a spinning top candlestick pattern. These candlesticks usually mean a larger reversal can occur especially at the end of a sustained bullish or bearish run. For this month’s candle to put in a spinning top, it would have to close next Tuesday’s trading session between $560 and $570. Today’s gap down should have a bit of lasting power to drive us down there. While $600 is a big round psychological number and we are chopping around there intraday, I think this is a bit of short-term profit-taking and short-covering.
If this does manage to close June at $560, then that should portend further July weakness where we could be aiming to retrace the body of the prior month’s candlestick, which opened May at $460. I’d expect this to be a significant retest and bounce off this level (red path). After this bounces, depending on the broad market and where this sector settles, this may end up being only a dead cat bounce. As others have pointed out, this has a similar feel and run up as Gold and Precious Metals did in the past few months.
Similarly, I think would not simply pullback and begin retesting new highs immediately. While this may mean it simply settles here and turns higher, it also means there is potential for a draft down even further towards the prior month breakout level at price $360, the blue path (also, just realizing this moved $100 for each of the past 2 months??). At any rate, I put these yellow arrows to show potential basing patterns which this could follow. I also threw in a deep fall towards July 2025 levels before basing, though I don’t think this is as likely as the other two paths.
The weekly chart looks deliciously set up for further weakness. The current week is looking like a large engulfing red candle and I drew a teeny red line to show how close it would be to close by next Tuesday at $560. I also drew horizontal lines at what will be important levels for next month at $520 (the June lows and prior consolidative area) and $460. Not much more to say here that wasn’t said above. This is just to reinforce the importance of these levels, and the potential now return to retest them.
I am again showing this to reinforce the importance of these levels even on a shorter time frame and potential for retest. $560 is within spitting distance and has 5 days to get there. Beneath that is June month lows at $520 and prior breakout pattern level at $540, not to mention the 50 Day MA around this area. I drew a little red circle to show the important and potential bounce zone. Beyond that, there is the prior breakout pattern level and May open at $460 as well as the next retest level at $480.
So, going back to my interpretation of the Warsh Fed comments, the broad market has taken this to be pretty harsh sentiment from the Fed. Not only will it be potentially more hawkish than they were hoping, but they will also be less transparent. Whether that lack of transparency works to their benefit, the bigger companies know that they can’t rely on hope and are likely beginning to prepare for potential rate hikes. While semiconductors were riding sky high, the rest of the market already started taking hits and this sector benefitted in the short-term as FOMO investors wanted to get into a sector that looked like it just wanted to keep going higher.
Now it feels like it is at a turning point and we will see a deflation of this sector (I strongly hesitate to say outright collapse, but one can dream) to levels a little more reasonable at the very least. This sector is a big mover, so position entry is key as you don’t want to get caught shorting the low and having to hold into large bounces. But overall, I think the big direction next is down, so I intend to ride this volatility down for a good while.
