The Semiconductor HOLDRs
exchange-traded fund is a highly liquid and tradable vehicle that mirrors the price movement of the large-cap semiconductor firms.
The top two components --
-- account for a whopping 45% of the ETF weighting while the top seven components make up 80% of the ETF. This concentration of weightings usually results in exaggerated moves, either up or down.
From a trader's perspective, I have a desire to trade this vehicle short, but after a close examination of the charts the short trade just doesn't seem quite ready yet. Here's why and the parameters for when it may be ready.
On a long-term time frame, SMH is gnawing away at a huge supply line that ranges from the $26 to $29 price range and that is unlikely to give way near term.
Over time, the continued push into that area eats away at the supply and offers the possibility of even greater future gains.
It's when we shift to the intermediate term, though, that you can see why I favor the short side on SMH.
On this time frame, there are two pressing problems. First, the higher trending prices are
, and not just barely. The divergence between price and volume is rather extreme. As we can see though, suspect bullish doesn't necessarily equate to bearish as SMH first became suspect back in the June time frame. We are now closing out the year while the suspicious nature of the advance continues.
In the past couple of weeks, we have seen the red flag waved once more as the suspicion of directional truth continues. Note the channel line break as well. That was a well-defined channel that held prices since the March lows. As typically happens on such a channel break, prices pull back then surge again to the underbelly of the channel line. That is typically where they end up failing once more. As we know though, this market has been anything but typical for a while now.
In the short term, the suspect bullishness is evident again and again while the volume discrepancy is characterized by an even wider margin.
The problem in shorting SMH, however, is that an AB=CD pattern is clearly visible on the current thrust higher and it projects to roughly $28.40. That's another $1.30 higher. Since prices are supported here by the $26.78 swing point, it appears that SMH wants to run into the higher number.
Glancing back at the long-term time frame, we can see that an advance to the mid-$28 area would still be within the large supply line. The continued supply along with the completion of the AB=CD pattern would probably offer a good technical setup that could make SMH turn around and head back the other way.
Thus, there is a trade to the upside here for aggressive short-term traders using a close below the $26.78 area as a tight stop out area with a target of the $28.40 price point. Unless something changes between now and then, that looks to be a nice place to try and work the trade back the other way as all these breaks higher on lower volume are going to eventually require retests.
So until next time, keep trading the charts!
At the time of publication, Little had no position in the securities mentioned.
L.A. Little is an author, professional trader and money manager who writes daily on
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