The Semiconductor group is important to the performance of the Nasdaq and the Nasdaq is important to the performance of the overall market. Recent bearish developments in the Semiconductor HOLDRS (SMH) bode ill for the group and this is likely to weigh on both the Nasdaq and the S&P 500.
There are two bearish patterns at work and momentum recently turned negative. First, the advance from 29 to 36 formed a rising wedge and the mid October decline broke the lower trendline. Second, the ETF formed a head-and-shoulders pattern that extends back to early September and broke neckline support with a gap down on Thursday. For momentum, I am using RSI and this key indicator moved below 50 over the last few weeks. Notice how the stock held strong as long as RSI was above 50 (green box). The recent move below 50 shows a clear negative shift in momentum.
Until there is evidence to the contrary, I expect lower prices in SMH and this will weigh on the Nasdaq. What would it take to prove the bearish case otherwise? The right shoulder amounts to a consolidation with support at 33.3 and resistance at 34.5. SMH would have to recover the support break AND move above resistance from the right shoulder. Momentum would also have to improve and I would make RSI move above the late October high (53). These developments would be bullish and project further strength to 39. Let's see it happen first though.
