With all of this talk about Head & Shoulders Tops in the S&P500, I think it’s important to watch the sectors that lead the market. To me, Semiconductors are one of those important sectors. I suppose one can make an argument that there is a similar type of head and shoulders pattern forming in $SMH with a fixed neckline around $32:
With a rising 200 day moving average, I think the risk here is for bears to get trapped below the neckline and get squeezed in a quick rally back above $32. This is how we have seen most of these Head & Shoulders patterns play out throughout the recent market rally that began in the spring of 2009. With that said, let’s at least be aware of any possible scenarios. If $SMH breaks down below $32 and does NOT quickly recover, then the measured move to the downside would likely take you to around $27.
Regardless of the direction of the next major move in Chips, I think it will be a violent one. Same thing goes with the overall market. We have been up and down, but basically side ways all year. These long consolidations typically resolve themselves in the direction of the underlying trends, but we should at least be aware of all scenarios so we can manage risk appropriately.
This chart up top of $SMH is a good one to keep on our screens. Happy Trading.