Semiconductor ETF Is a Buy as It Holds This Key Level

The iShares PHLX Semiconductor ETF is trading above its 200-week simple moving average, which is a positive. A return to this reversion to the mean is a buying opportunity.
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Demand for semiconductors is a key measure of the strength of the global economy, as so many products we buy contain computer chips. This includes our smallest hand-held devices and our motor vehicles.

The iShares PHLX Semiconductor ETF  (SOXX) - Get Report is trading above its 200-week simple moving average, which is a positive. A return to this reversion to the mean is a buying opportunity.

Similar patterns are noted for the top two holdings in the ETF, namely Nvidia  (NVDA) - Get Report and Texas Instruments  (TXN) - Get Report.

Nvidia makes computer chips for gaming and mobile applications. These are necessary as more employees work at home.

Texas Instruments has 45,000 patents on everything from hand-held devices to multicore processors.

The SOXX is down 29% year to date and in bear-market territory 34% below its all-time intraday high of $269.36, set on Feb. 14. It set its 2020 low of $174.32 this morning, March 17.

Nvidia is down 17% year to date and in bear-market territory 38% below its all-time intraday high of $316.32, set on Feb. 20. It set its 2020 low of $191 this morning, March 17.

Texas Instruments is down 27% year to date and in bear-market territory 31% below its all-time intraday high of $135.70, set on Jan. 22. It set its 2020 low of $93.07 on Monday, March 16.

The Weekly Chart for the SOXX

The Weekly Chart For The Semiconductor ETF

The Weekly Chart For The Semiconductor ETF

Courtesy of Refinitiv XENITH

The weekly chart for the SOXX is negative, with the ETF below its five-week modified moving average of $229.30. 

The ETF is above its 200-week simple moving average, or reversion to the mean, at $169.52. The last time the reversion to the mean was tested was during the week of Feb. 12, 2018.

The 12x3x3 weekly slow stochastic reading is projected to end this week at 41.09, down from 49.74 on March 13. 

During the week of Jan. 24 this reading was 92.67, which put the ETF in an inflating parabolic bubble - and bubbles always pop.

Trading Strategy: Buy weakness down to SOXX's 200-week SMA at $169.52. Reduce holdings on strength to its annual pivot at $230.40.

The Weekly Chart for Nvidia

The Weekly Chart For Nvidia

The Weekly Chart For Nvidia

Courtesy of Refinitiv XENITH

The weekly chart for Nvidia is negative, with the stock below its five-week modified moving average of $248.81. 

The stock is above its 200-week simple moving average, or reversion to the mean, at $170.55. The last time the reversion to the mean was tested was during the week of June 7, 2019, as a buying opportunity.

The 12x3x3 weekly slow stochastic reading is projected to end this week at 52.32, down from 63.94 on March 13. 

During the week of Jan. 24 this reading was 91.34, which put the stock in an inflating parabolic bubble - and bubbles always pop. 

The stock could have been sold at its semiannual risky level at $299.72. This could be bought back at its annual value level at $205.17.

Trading Strategy: Buy weakness down to its 200-week SMA at $170.55. Reduce holdings on strength to its semiannual risky level at $299.72. Its annual pivot at $205.17 should remain a magnet.

The Weekly Chart for Texas Instruments

The Weekly Chart For Texas Instruments 

The Weekly Chart For Texas Instruments 

Courtesy of Refinitiv XENITH

The weekly chart for Texas Instruments is negative, with the stock below its five-week modified moving average of $115.80. 

The stock is above its 200-week simple moving average, or reversion to the mean, at $97.85 after it was below it on March 16.

The 12x3x3 weekly slow stochastic reading is projected to end this week at 34.69, down from 42.51 on March 13.

The stock could have been sold at its annual risky level at $129.02. This could be bought back this week at its 200-week SMA at $97.85.

Trading Strategy: Buy weakness down to its 200-week SMA at $97.85. Reduce holdings on strength to its annual risky level at $129.02.

How to use my value levels and risky levels:

The closes on Dec. 31, 2019, were inputs to my proprietary analytics. Quarterly, semiannual and annual levels remain on the charts. Each uses the last nine closes in these time horizons.

Monthly levels for March were established based on the Feb. 28 closes.

New weekly levels are calculated after the end of each week.

New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

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 past 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.

A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months.

A reading below 10.00 is considered as being “too cheap to ignore” which typically is followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.