We are always on the lookout for chart patterns. We found a bearish head and shoulders developing on Semiconductors (SMH).
Looking at the daily chart below we can see the pattern developing. However, we do have to point out participation. Note the very low percentages on %Stocks > 20/50EMAs. These are clearly oversold readings and if we look back at the vertical green lines that mark cardinal price bottoms, you’ll note they were at these levels. One thing to keep in mind is that oversold conditions can persist in a bear market. SMH is down over 20% from the July top so we could see low readings for some time.
The Silver Cross Index is about to see a Bearish Shift across the signal line and that would give us a Bearish Bias in the intermediate term. It is already at a very low 36% reading suggesting how unhealthy this group is.
This head and shoulders pattern looks dangerous. Textbooks tell us that a break below the neckline would imply a downside move that is the height of the pattern. That would take price back down to 120.00. We doubt that will happen, but 160.00 doesn’t seem out of the question if this pattern executes.
Conclusion: Semiconductors (SMH) are in a bear market and are now forming a bearish head and shoulders pattern that would imply a drop well below 160.00. Given participation readings are very oversold, we aren’t so sure it will see that kind of devastation, but we definitely should be prepared for more downside from this group.
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Erin Swenlin is a co-founder of the DecisionPoint.com website along with her father, Carl Swenlin. She launched the DecisionPoint daily blog in 2009 alongside Carl and now serves as a consulting technical analyst and blog contributor at StockCharts.com. Erin is an active Member of the CMT Association. She holds a Master’s degree in Information Resource Management from the Air Force Institute of Technology as well as a Bachelor’s degree in Mathematics from the University of Southern California.
