The technology shares after making a low on Wednesday rallied into the end of the week but gave up some of the early gains on Friday. There has been plenty of carnage in some of the best performing stocks but is the decline from the November 22th high already over?
According to a Friday Bloomberg article the Hedge Funds Love Tech Again the correction could be over. The comments from Credit Suisse and Societe Generale analysts suggest that the decline was ‘short-lived re-allocation”. But does the technical outlook for the market leading semiconductor stocks support their conclusion?
From the February 2016 low to the recent high the VanEck Vectors Semiconductor ETF (SMH) is up 137% compared to a 68.2% gain in the PowerShares QQQ Trust (QQQ). The more diversified S&P 1500 Semiconductor Index was up just over 121% during this period.
In looking at an ETF, stock or market index I find it helpful to determine the long term trend by analyzing the monthly chart and technical studies. In November 2017 SMH had a high of $105.83 which was well above the monthly starc+ band at $101.13.
The monthly relative performance moved above ten month resistance, line a, at the end of May 2016 (line 1). The monthly OBV shows a similar bullish signal as it pushed above its resistance at line b. Both indicators made a new high with SMH in October. They have turned down but are well above their rising WMA and therefore positive.
The last significant correction in the VanEck Vectors Semiconductor ETF (SMH) occurred from June 2015 through February 2016 (see shaded area). From high to low it declined 27.6% as the monthly starc- band was tested after SMH had declined for three months.
The weekly chart of SMH shows that at last week’s low of $95.92 SMH came close to its weekly starc- band and the 20 week EMA which is generally a good level of support. There should also be good support at the June high of $89.72.
The weekly RS did make a new high three weeks ago before it dropped below its WMA which is starting to flatten out. The RS is still above the support at line b. The weekly on-balance-volume (OBV) also made a new high with prices and dropped below its WMA. It would take a strong close next week to move the OBV back above its WMA.
The daily technical studies turned negative on November 27th as the RS dropped below its WMA while the OBV formed a negative divergence at the highs (line b) and then dropped below its WMA. The OBV line also broke the uptrend from the August lows, line c. It has rallied from Wednesday’s low but is still well below its declining WMA.
The 38.2% support for SMH at $96.30 was exceeded on Tuesday before it rebounded as it closed higher Wednesday and Thursday. It hit a new rebound high at $99.64 on Friday but then closed lower. Both the RS and OBV have turned lower and show patterns consistent with an oversold rally not a bottom.
My reading of the multiple time frame charts of SMH suggests that the decline is not yet over. To confirm this I took a look at Micron Technology (MU) and NVIDIA Corp (NVDA) two of the more popular semiconductor stocks that I follow in the Viper Hot Stocks Report. I have written about Micron several times in the past.
Micron Technology (MU) reached the declining 20 day EMA and the 50% retracement resistance on Friday before closing lower. The pattern is consistent with a rebound in a downtrend. A decline to the 50-61.8% support looks likely which gives a downside target in the $38.37-$35.65 area. I would not expect the September 26th low of $34.09 to hold.
The daily RS broke below support, line a, on 11/30 and is still below tis declining WMA. The OBV also look negative as it has been acting weaker than prices after dropping below support at line b. IF MU rallies more sharply it will still take some time before the WMA can turn higher.
NVIDIA Corp (NVDA) does not look any better as at Tuesday’s low of $180.58 it was down 17.3% from the November high at $218.52. The daily starc- band is now at $177.37. The 38.2% Fibonacci support is at $171.43 with the 50% support at $156.88. Corrections often end between the 38.2% and 50% support levels.
The relative performance has dropped below the support that goes back to July, line c, which is not a good sign. Its WMA is declining sharply and will take some time before it could bottom out. The OBV just tested its WMA before turning lower. A lower close Monday will be consistent with a failing rally.
In conclusion, the technical evidence does not support the view that the semiconductor stocks have completed their corrections. A further decline is likely to create a very good buying opportunity but it may not happen before year end.
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