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For a little over two years, the Market Vectors Semiconductor ETF (NYSE MKT: SMH) was confined to an upward sloped trend channel that helped the price climb from under $35 per share to a high over $60 per share in June. The SMH fund broke below the lower rail of the channel in late July and is now fighting back and looking to establish a new trend.
The weekly chart shows the former trend channel and the break of the lower rail, but it also shows how the price has reversed and has established a new trend with a series of higher lows over the last four months.
The sharp rally has caused the weekly stochastic readings to reach overbought status, but the 10-week RSI did not reach such a level. If you look back on the chart, the corrections have come as both oscillators were in overbought territory.
With only the stochastic readings reaching overbought status, I can see the semiconductor ETF moving sideways for a few months, which will allow these indicators to move out of overbought territory. This is what happened late last year, and we could see a similar development this year.
Turning our attention to the daily chart we see that the SMH has established a short-term trend channel and has just bounced off the lower rail of the channel. We also see that the daily stochastic readings reached an oversold level before reversing course and moving higher.
The pattern in the oscillators is similar to what we saw in late September, when the stochastic readings reached oversold levels but the 10-day RSI only moved down to the 35-40 range. When this pattern developed in September, the SMH rallied from the $48 level all the way up to $56 – a 16% move. If we were to get a similar move this time, the stock would move up above the $61 level.
Looking at the sentiment toward the top five holdings of the SMH, we see mainly neutral sentiment toward the stocks, with a little bit of moderate bullish sentiment. Four of the five stocks have short interest ratios over 3.0 and one has a short interest ratio over 5.5. Collectively, the five stocks have 65 “buy” ratings, 60 “hold” ratings and 13 “sell” ratings. Seeing more hold and sell ratings than buy ratings is unusual for a major sector.
While the weekly chart shows the SMH is overbought based on the stochastic readings, I still think now is a good time to buy the semiconductor ETF because of the daily chart and the sentiment toward the chip sector.
If you are a short-term trader, the bullish crossover of the stochastic readings is a good sign and I can see the price jumping to the $61-$62 range. If you are more of an intermediate-term investor, I think you buy the stock at the current level and hold it for the next six months or so and you should make 20% or more on the trade.
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