Semiconductor ETF Is Near Risky Level - Here's How to Trade It

Here's how to trade the semiconductor ETF and its top five components; Nvidia, Texas Instruments, Qualcomm, Intel and Broadcom.
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Demand for semiconductors is a key measure of the strength of the global economy. Almost every product we buy contains computer chips. This includes our smallest handheld devices all the way to our motor vehicles.

The iShares PHLX Semiconductor ETF (SOXX) - Get Report has been on a strong bull run that is now nearing its semiannual risky level. 

This rally began from its 200-week simple moving average when it was $74.03 during the week of Feb. 12, 2016. It’s now more than tripled to above $250.

The rally did not proceed without a correction. From a high of $198.84 set during the week of March 16, 2018, SOXX declined a bear-market 27% to its Dec. 26, 2018, low of $144.79.

Three of the top five components of SOXX are leading the way while the other two are lagging. All five have had similar up-and-down volatility.

The five largest components are Nvidia (NVDA) - Get Report, Texas Instruments (TXN) - Get Report, Qualcomm (QCOM) - Get Report, Intel (INTC) - Get Report and Broadcom (AVGO) - Get Report. Here’s a performance scorecard.

Scorecard For The SOXX And Its Five Largest Components

Scorecard For The SOXX And Its Five Largest Components

The Weekly Chart for SOXX

Weekly Chart For The SOXX

Weekly Chart For The SOXX

Courtesy of Refinitiv XENITH

The weekly chart for SOXX is positive but overbought, with the ETF above its five-week modified moving average of $244.22 and well above its 200-week simple moving average, or reversion to the mean, at $161.99. The stock is thus 57% above its technical reversion to the mean.

The 12x3x3 weekly slow stochastic reading is projected to end this week at 93.09, which puts the ETF in an inflating parabolic bubble.

Trading Strategy: Reduce holdings on strength up to its semiannual risky level at $257.30. Buy weakness to the horizontal lines on the chart, which are its quarterly, annual and monthly value levels at $230.59, $230.40 and $224.10, respectively.

The Weekly Chart for Nvidia

Weekly Chart For Nvidia

Weekly Chart For Nvidia

Courtesy of Refinitiv XENITH

The weekly chart for Nvidia is positive but overbought, with the stock above its five-week modified moving average of $226.89 and above its 200-week simple moving average, or reversion to the mean, at $159.59. The stock is 52% above its technical reversion to the mean.

The 12x3x3 weekly slow stochastic reading is projected to end this week at 92.27, which puts the stock in an inflating parabolic bubble.

Trading Strategy: Reduce holdings on strength up to its semiannual risky level at $299.72. Buy weakness to the horizontal lines on the chart, which are its quarterly, annual and monthly value levels at $222.38, $205.17 and $196.41, respectively.

The Weekly Chart for Texas Instruments

Weekly Chart For Texas Instruments

Weekly Chart For Texas Instruments

Courtesy of Refinitiv XENITH

The weekly chart for TI is positive, with the stock above its five-week modified moving average of $126.42 and above its 200-week simple moving average, or reversion to the mean at $94.71. The stock is thus 39% above its technical reversion to the mean.

The 12x3x3 weekly slow stochastic reading is projected to end this week rising to 69.89, so the stock is not yet overbought.

Trading Strategy: Reduce holdings on strength to its semiannual risky level at $143.65. The stock is just above its annual pivot at $129.02. Buy weakness to the lower horizontal lines on the chart, which are its monthly and quarterly value levels at $124.80 and $122.80, respectively.

The Weekly Chart for Qualcomm

Weekly Chart For Qualcomm

Weekly Chart For Qualcomm

Courtesy of Refinitiv XENITH

The weekly chart for Qualcomm is positive, with the stock above its five-week modified moving average of $87.44 and well above its 200-week simple moving average, or reversion to the mean, at $62.93. The stock is 43% above its technical reversion to the mean.

The 12x3x3 weekly slow stochastic reading is projected to rise to 70.92, this week which indicates that additional gains are likely.

Trading Strategy: Qualcomm does not have a risky level. Buy weakness to the horizontal lines on the chart, which are its semiannual, annual, quarterly and monthly value levels at $84.14, $83.75, $75.16 and $71.77, respectively.

The Weekly Chart for Intel

The Weekly Chart For Intel

The Weekly Chart For Intel

Courtesy of Refinitiv XENITH

The weekly chart for Intel is positive but overbought, with the stock above its five-week modified moving average of $58.34 and well above its 200-week simple moving average, or reversion to the mean, at $43.70. The stock is 36% above its technical reversion to the mean.

The 12x3x3 weekly slow stochastic reading is projected to end this week at 91.52, which puts the stock in an inflating parabolic bubble.

Trading Strategy: Intel does not have a risky level. Buy weakness to the horizontal lines on the chart, which are its quarterly, semiannual, annual and monthly value levels at $58.02, $57.37, $57.17 and $54.67, respectively.

The Weekly Chart for Broadcom

Weekly Chart For Broadcom

Weekly Chart For Broadcom

Courtesy of Refinitiv XENITH

The weekly chart for Broadcom is negative, with the stock below its five-week modified moving average of $309.95 and above its 200-week simple moving average, or reversion to the mean, at $235.90. The stock is 30% above its technical reversion to the mean.

The 12x3x3 weekly slow stochastic reading is projected to end this week declining to 73.12, falling below the overbought threshold of 80.

Trading Strategy: Reduce holdings to its annual and semiannual risky levels at $337.86 and $352.39, respectively, and buy weakness to its quarterly and monthly value levels at $293.32 and $265.89, respectively. The horizontal lines are the value levels. 

How to use my value levels and risky levels:

The closes on Dec. 31, 2019, were inputs to my proprietary analytics and resulted in new monthly, quarterly, semiannual and annual levels. Each uses the past nine closes in these time horizons.

New weekly levels are calculated after the end of each week. New monthly levels occur after the close of each month. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at midyear. 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.