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By Bryan McCormick

A bearish pattern in SMH, the Semiconductor HOLDRS exchange-traded fund, is active today and about halfway toward completion. On the daily chart below I have drawn in a sloping orange line that is the "neckline" of a bearish "head and shoulders" formation.

The SMH pattern became active several days ago and is now about halfway toward its potential downside target at the $27 area, as shown by the vertical orange line. (That is a minimum downside objective, by the way; it is possible for patterns to be the initiator of a much larger move.)

In terms of the broader markets, weakness in the sector is no positive indicator. We may only be partly through the corrective phase.

With technology so heavily weighted in the S&P 500, it is important to keep an eye on semiconductor stock price behavior. The chip sector has been a key indicator of the overall health of technology stocks. Strength or weakness in semiconductors has augured good or bad times more broadly in tech. When we last saw a major turn in February 2009, it was just before the general market bottomed some three weeks later.

Because the developing pattern is already so far along, conservative traders may elect to use a short-term move average, such as a five- or 10-day, as a risk control. As always, be aware that patterns can and do fail without warning. Do your own homework and assess your risk tolerance.

[Click to enlarge]

SMH

Source: Chip Sector Shows Downside Pattern