Chip stocks are losing altitude after a solid two months to rebound and has been able to test much lower prices in the weeks to come. In turn, that could add to the downward pressure of the market-leading Nasdaq 100 index, bringing its short-term performance, in line with the delay in S&P 500 index. A sell-off would have the effect of reducing the semiconductor the area of improving the technical outlook, keeping the door open to a nasty test the March lows.
90 days of the application of the provision of the fragility of the first phase of the commercial agreement expires at midnight on Friday, raising the threat of a resurgence of tensions between the united States and China at the same time that tens of millions of people are without work. According to Reuters, the President Trump will block the sales of chips to Huawei, the smartphone manufacturer under investigation for allegations of political. China has said it will retaliate with an “unreliable” entity list” if this happens, limit the sale of U.S. high-tech products that include semi-conductors.
The president has pulled back from the more extreme retaliatory measures from firing the first shot of the war the trade in January 2020, but its hands may be tied by the application of the provision. In addition, it is now looking for a way to make China “pay” for the coronavirus, the keep on the top of the horizon 2020 policy agenda in the November election. This brinkmanship could put a nail in the coffin of the two-month bounce back, right at a major Fibonacci and moving average resistance levels.
The PHLX semiconductor Index (SOX) topped out at 1,362 in 2000, after a blistering uptrend, driven by the expansion of the internet bubble. It crashed off the peak in 2002, losing close to 85% of its value, before a resumption of the wave that has added at least 400 points in 2004. A sell-off from this level in 2007 has broken out of support to the deep low during the economic collapse of 2008, coming to rest at 12-year low in 2009.
A resumption of the wave in the new decade has just completed a round trip in the 2004 high in 2014, which gives an evasion that has stalled at the 50% retracement of the nine-year period of the downward trend. The SOX is disabled, this barrier in 2016, complete 100% retracement of the 2000 high in 2018. This soil, or far away at this level until October 2019 and has erupted, the display of an all-time high at 1,983 in February 2020, just before a 39% decline in the March low.
The rebound in April reversed at the .786 Fibonacci sell-off in the level of retracement at the end of the month, which gives a slowdown of activity that is now testing the 50 and 200-day exponential moving average (EMA) support between 1,650 and 1,675. A break would restore strength to these levels, increasing the chances that the index will retrace most of the first quarter of decline. This level has also generated a successful test in October breakout support in March, raising the stakes during a return visit.
NVIDIA Corporation (NVDA) stock is entered in a historic breakthrough in the second half of 2015, when cryptocurrencies triggered a mining frenzy, spiking the interest of the company high-tech for graphics cards. The rally stalled at $293 in October 2018, paving the way to a fourth-quarter decline, which has declined more than 57% of the value in December to two-year low. The 2019 bounce completed a 100% retracement of the prior high in February 2020, but the escape has failed in a 40% fall in the March lows at $181.
The recovery of the wave May completed 100% retracement February high, earlier this week, which gives a minor escape followed by a minor reversal. More importantly, the balance volume (OBV), the accumulation-distribution indicator has retraced less than half of the distance back to the February high, indicating that short-covering rather than committing the interest from buyers has pushed most of the bounce is to the upside. This deficit and the increase of the selling pressure in recent sessions is likely a sign of a significant decline.
The Bottom Line
Chip stocks are running low on gas after two months of bouncing back and could trace the majority of short-term gains.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.