The SOXX set its all-time intraday high of $218.00 on April 24 then began to plunge. The ETF is up 28% year to date and in bull market territory 38.8% above its Dec. 26 low of $144.79. Thursday's close at $200.91 is 7.8% below the all-time intraday high of $218.00 set on April 24. The decline from the April 24 high to Thursday's low touched 10% which is a buying opportunity even if a trade deal with China is not reached within the current negotiations.
Over the past week investors sold more than $20 billion in global equity funds just in case the China trade talks stalled. Given a market rebound, the upside for the SOXX is to its quarterly pivot at $207.09 and potentially to next week's risky level at $217.03.
If downside pressures continue the weekly chart for SOXX will turn negative next week which indicates downside risk is to monthly and semiannual value levels at $174.63 and $173.26, respectively.
Demand for semiconductors is extremely important as an economic indicator as almost every consumer product we buy contains computer chips from our small handheld devices to our huge refrigerators and automobiles. Our businesses operate in the cloud and employ artificial intelligence which depends upon hardware and software and all types of semiconductors.
The SOXX has 30 semiconductor stocks as components led by the five largest components shown in this table.
The Daily Chart for the SOXX
Courtesy of Refinitiv XENITH
The daily chart for the SOXX shows the formation of a "golden cross" on March 20 when the 50-day simple moving average rose above the 200-day simple moving average, indicating that higher prices lie ahead. In anticipation the ETF tested its 200-day SMA on March 8 when the average was $178.48. Note that Dec. 26 was a "key reversal" day as the ETF closed that day at $153.70 above the Dec. 24 high at $149.74. This was a clear indication that the SOXX would experience a tradeable rally. The ETF closed Dec. 31 at $156.91 which was an important input into my proprietary analytics. Semiannual and annual value levels remain at $173.86 and $158.35, respectively. The close of $189.54 on March 29 was the input to my analytics and its quarterly pivot at $207.09. The close of $211.56 on April 30 was input into my analytics and resulted in a monthly value level at $174.63. I show a weekly risky level at $217.03. The key level to hold is the 50-day SMA at $197.70.
The Weekly Chart for the SOXX
Courtesy of Refinitiv XENITH
The weekly chart for the SOXX is positive but overbought with the ETF above its five-week modified moving average of $200.61 and well above its 200-week simple moving average or "reversion to the mean" at $139.39. The 12x3x3 weekly slow stochastic reading is projected to end this week at 86.36 down from 91.39 on May 3 when the ETF was an "inflating parabolic bubble." A close on Friday, May 10 below $200.61 would have downgraded this chart to neutral, but SOXX landed at $201.20.
Trading Strategy: Buy weakness to the 50-day simple moving average at $197.70 and reduce holdings on strength to the quarterly and weekly risky levels at $207.09 and $217.03, respectively. On a downside break buy weakness to the monthly and semiannual value levels at $174.61 and $172.26, respectively.
How to use my value levels and risky levels:
Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original semiannual and annual levels remain in play. The weekly level changes each week; the monthly level was changed at the end of January, February, March and April. The quarterly level was changed at the end of March. My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.
How to use 12x3x3 Weekly Slow Stochastic Readings:
My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years. The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best. The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble" as a bubble always pops. I also call a reading below 10.00 as being "too cheap to ignore."
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.