Semiconductor stocks fell sharply from their mid-September highs
before rebounding in the past few trading sessions along with the
oversold bounce in the broader market.
But
they now look overbought in the near to intermediate term, presenting
traders with an opportunity to make quick profits on the short side.
When markets get volatile, it pays for traders to reduce their
average position size, widen stop-losses and profit targets, and
generally try to play the swings in the broader market as opposed to
focusing on individual stocks.
When it comes to volatile sectors, such as semiconductors, trading an
ETF rather than a single stock can be a good idea regardless of broader
market volatility.
Looking at the weekly logarithmic chart of the
Market Vectors Semiconductor ETF (NYSE: SMH), note that the recent sell-off took it right back down to its late 2008 uptrend line.
A closer look reveals that upside momentum, as represented by the
Relative Strength Index (RSI),
topped in July while price continued to rise into the September highs.
This type of multi-month negative divergence often doesn't end with a
quick sell-off. Rather, the selling typically occurs in at least two
waves.
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