In 2019, semiconductor investors have been on one wild, volatile… but ultimately happy ride.

Crawling from the wreckage of 2018’s year-end selloff, the sector – as represented by the Vaneck Vectors Semiconductor ETF (SMH) – has gained over 50% year-to-date.

It hasn’t come easy. The index suffered an 18% drawdown from April to May… And another 12% loss from July to August.

Still, the index has more than doubled the performance of the S&P 500, which has risen “just” 22% this year. That’s a remarkable return for an ETF in just 10 months.

But lately, something’s been off about it… And now, it seems like investors should prepare for another ugly fourth quarter.

If you’re sitting on gains in the semiconductor sector, you should take them – and soon.

Today I’ll show you why…

Take a look at this daily chart of SMH…

The price of SMH has formed a bearish rising wedge pattern in the past few weeks.

Regular readers know that a bearish rising wedge pattern occurs when the price of a security makes a series of higher highs and higher lows, while the distance between those highs and lows contracts. These patterns usually resolve to the downside… sometimes dramatically. 

Folks are often skeptical of these patterns. To many, they just look like natural, bullish price action. And, if I had nothing else to point to, I wouldn’t blame you for thinking the semiconductor rally would run through the end of 2019.

But that’s where the momentum indicators come into play.

As you can see, the MACD and RSI indicators have diverged from the bullish price action in SMH. That tells me that the bullish momentum is running thin… and one bad trading day could see the index break down.

Even more interesting… the RSI is actually cycling back to neutral. It’s consolidating energy for a big move.

The past few weeks have been fairly low-volatility for the index. But periods of low volatility are almost always followed by periods of high volatility… which generally means lower prices.

SMH has about another week or two to chop around in this pattern. If it breaks to the downside as I expect, we could see the index fall to its closest support at about $121. That’s over a 4% drop from here.

If that fails, the index could tumble all the way down to its next support at $116… or even further to around $110. That’s closer to a 13% loss.

Anyone with holdings in SMH, or individual semiconductor stocks, should start working on an exit strategy.


Mike Merson
Managing Editor, Market Minute

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