The Next Test for AI’s Uptrend

The VanEck Semiconductor ETF (SMH) holds 26 of the world’s largest microchip manufacturers. And since October last year, it has been heading in one direction… up.

Several of its holdings have seen massive gains – like Nvidia (NVDA) and Taiwan Semiconductor Manufacturing (TSM). As a result, SMH doubled in just nine months.

But buyer momentum has recently been softening. And these stocks are coming under increasing pressure.

NVDA and TSM are both down around 15–16%, respectively, from their recent highs. Given their combined 30% weighting in SMH, they have started to drag it lower too.

So today I want to see if SMH’s longer-term uptrend remains intact…

Huge Hype Around AI

The red trendline on the chart below shows SMH’s steady climb since October last year…

After bottoming out at ‘A,’ SMH made a series of higher lows at ‘B’ and ‘C’ before its rally accelerated strongly in May:

VanEck Semiconductor ETF (SMH)

Source: eSignal

Throughout SMH’s rally, there have been repeating patterns.

Each leg higher coincided with the Relative Strength Index (RSI) breaking up through resistance (green line) into its upper band.

Those moves petered out and reversed when the RSI retraced from overbought territory (upper grey dashed line).

The 10-day moving average (MA, red line) breaking above the longer-term 50-day MA (blue line) also confirmed the up legs. You can gauge the strength of SMH’s jump in May by the size of the 10-day MA’s move above the 50-day MA.

As we saw when we checked out SMH on June 12 (red arrow), a key driver of this move came from the huge hype around NVDA’s strong profit result that sent it into the “trillion-dollar” club.

However, after that strong surge in May, SMH’s rally started to soften (upper orange line).

Although SMH was making higher highs, the RSI was making lower highs (lower orange line), indicating a steady decline in momentum.

Take another look:

VanEck Semiconductor ETF (SMH)

Source: eSignal

That drop in momentum deepened this month with the RSI falling back through support.

This action dragged SMH’s stock price lower. It recently closed below the 50-day MA. And that move looks set to drag down the 10-day MA below the 50-day MA too.

So SMH’s immediate signals look weak. But it’s the action around its trend line (red line) that holds the keys to SMH’s longer-term prospects.

So what am I looking for around here?

Intersecting Trendline

Although SMH is falling, it is still trading above its long-term uptrend.

If and when SMH intersects this trend line (orange arrow), it will be critical for SMH’s next move…

If SMH can lock in a higher low at ‘D,’ then its long-term uptrend will remain intact.

That’s why I’m watching the RSI closely.

As the chart shows, the RSI is currently tracking lower and could soon test oversold territory (red circle). That’s likely to happen around the same time that SMH tests its trendline.

If the RSI bounces strongly out of oversold territory, then SMH will likely also bounce.

However, if the RSI instead gets stuck in its lower band, SMH could break below $140, ending its current uptrend.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

Mailbag

Do you have a question you’d like Larry to answer in a future update? Send it our way at [email protected].

The question and answers with Chris Lowe (video as well as written interview) have been excellent. I trade options and it has been a great learning experience for me to see how a professional options trader goes about his business. Please continue with these interviews. They are extremely helpful, and I learn so much from them.

– Jack H.