One of my favorite setups are when prices of a given asset make new highs through important resistance that then fail to hold while momentum simultaneously diverges before confirming those new highs. The Semiconductors are putting in exactly this type of pattern to start the week. But more importantly, these failed breakouts and bearish divergences are taking place on multiple timeframes.
The first chart shows the weekly candlesticks for $SMH putting in a higher high a couple of weeks ago that is proving to be a failed breakout. Notice how momentum is putting in a bearish divergence as it made a lower high 2 weeks ago as prices make higher highs. The old saying is that, “From Failed Moves, Come Fast Moves In The Opposite Direction”. In this case, down.
The next chart shows the daily timeframes. We’re seeing the exact same thing: New highs in early September that could not hold while momentum put in a bearish divergence:
We always look at multiple timeframes to get more of a structural perspective, and then look shorter-term for execution and risk management. When both timeframes suggest the same thing, I have much more conviction in the conclusion.
Shorts can use the July highs as an area to keep a buy stop. We would not want to be short above this levels, as that would likely invalidate the bearish thesis laid out above. Target-wise, the August lows just under 48 could offer some support, but in all likelihood we are going much lower than that. Down moves that follow failed breakouts tend to be more volatile in nature and last longer than traditional corrections. I would not be surprised to see at least a retest of the 200 day moving average just below 46.
We will keep reevaluating in coming weeks. Feel free to contact us at MemberServices@eaglebaycapital.com if you are interested in our US Sectors & Sub-sectors package that we will be launching later this month. Semiconductors will be included among the over 50 charts delivered in this weekly research report.
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Tags: $SMH $SOX $XSD $SOXL $USD $PSI $SOXS $SSG