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Over the last few months, very few stocks based in Asia have been able to hold their ground. Indexes in China, Hong Kong, Japan, Singapore and Taiwan have all dropped sharply. Even the stocks of companies with significant international revenue streams have been hit as investors worry about an economic slowdown throughout the region.
One company that has been caught up in the selling is Taiwan Semiconductor Manufacturing Co. (NYSE: TSM).
Taiwan Semiconductor stock is down from a multi-year high of $25.14 in April and dropped as low as $17.32 a few weeks ago before bouncing back. The stock rallied sharply over the last few weeks, and as a result, the daily slow stochastic readings hit overbought levels and just experienced a bearish crossover Wednesday.
The $20-$20.50 range is an important one for the stock, as the area served as support in a small pullback in January. Now the stock appears to be having a little trouble moving back above this level.
Another factor in my bearish outlook for Taiwan Semiconductor stock comes from the weekly chart. The stock fell below its 104-week moving average in recent weeks, and it had not closed a week below the moving average since 2009.
We see in the chart that in July 2012 and January 2014 the stock flirted with the trend line, but never closed a week below it. Now that the stock has closed below the trend line, I think it is going to have a hard time moving back above it.
Back in 2008, the stock dropped below the 104-week moving average, rallied back up in to it and then proceeded to drop another 40% after that. We may not see that big of a decline this time, but I can see the stock dropping down to the $16 level.
The sentiment toward Taiwan Semiconductor is moderately bearish, but I don’t see it being bearish enough to spur a short covering rally or anything like that. The short interest ratio is a modest 4.38 at present. The analyst ratings show three “buy” ratings, two “hold” ratings and three “sell” ratings.
I would look to short Taiwan Semiconductor stock at its present level and down as low as $19. I would set $16 as an initial target with the thought of re-evaluating when the stock gets there. If the sentiment has turned more bullish or the momentum is still decidedly to the downside, I might close part of the position and keep the rest open.
On the flip side, I would keep an eye on the 13-week moving average as a point to exit the trade if it goes against you. The 13-week is moving down pretty rapidly, and if the stock gets enough momentum to the upside to move back above it, that is an indication that the downside momentum has been broken.
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