[SOX] Bull Flag Breakout! Upside Targets and the Risks for Chips
Updated
Semiconductor chips has broken above the horizontal flag it's been in since the strong rally off recent lows. The index ETF charted here, SOXX, was up over 13% from the 4/25 to 5/14! Today breaking out above resistance around $188, SOXX is up nearly 1% and with steadily increasing bull volume last few days.
Roughly speaking, looks like the SOX is in an ascending broadening formation. It's hard pin down this pattern because of a lot uncertainty intra-formation.
From here, IF this breakout follows through, I'm looking at the $195-$200 area as upside targets for a couple reasons:
1) Ideal Fibonacci extension of 61.8% puts price at $201 and the 41.4% extension level is at the $196 area. The 161.8% looks to be more likely as a top than the 141.4% area, at this point in time, due to the reason #2.
2) Upper trendline here is rising and I've taken the risk of cutting through a few candles at the peaks and using the gaps and gap fills as an alternative guide. This upper resistance aligns almost perfectly, not only with the 161.8% level of $200, but also with a rough estimate of the timing. By literally copy and pasting the solid green arrow (take with a grain of salt), using the same angle of ascent all the way to my upper trendline in purple would indicate a convergence of 3 different indicators around the same point in time and space. Assuming this continuation breakout follows through of course.
Fundamental uncertainty is high and unsurprisingly so is volatility, hence the wild broadening formation. The last week or so was the bears' chance to force a head&shoulders pattern, which would have been really bad news for SOX and the entire market. It still can be possible, without a doubt. However, it seems that we have just completed a triangle/bull flag indicating continuation. We got continuation and breakout today to end the week on a positive note for the long weekend, a psychological benefit imo.
The Bearish Argument:
Volatility is unpredictable, many tweets could be made over memorial day weekend. Volume isn't that high, but very slowly rising. Here's a few things to watch carefully in case of a fake breakout:
A) The breakout resistance around $186.50 needs to turn support (dashed red line) in the event that we see a retest. Dropping and holding below that could lead to an acceleration to the downside with or without a pause at the last resort support just below the $182 area (solid red line). This puts longer term downside potential in play if bears follow through.
B) Could be nice to take a large portion of profits at target 1 given uncertainty. Perhaps this would be a spot to consolidate or slow down before potentially seeing an exhaustion gap up to the peak of target 2. Ideal scenario though, watch any consolidations or resistances carefully and assess volume intraday. Pull profits periodically on huge surges up. Being inside this large broadening formation means that clear volume spike in either direction isn't gonna be likely on this trade. Large moves can happen on low volume and be easily reversed. Before reaching either target.
C) Fundamentally, watch QQQ and XLF related news. Both are looking to breakout of respective patterns but haven't yet. The markets as a whole tend to rally when both these tech and financial sectors are trending up at the same time. And also given geopolitics, I'm watching USOIL and XOP for big changes. Oil is coming off recent highs giving relief to the non-energy production sectors. Sudden moves could throw off any balance between sectors. And obviously, look at Chinese trade negotiations. It's so back and forth, on and off lately that it appears the market is giving up on listening to the developments unless some tangible and measurable actions take place. Which is exactly how the market gets blindsided when something does actually happen. I'm going to try to stay up to date with the news on trade closely even though it seems meaningless to do so.
Roughly speaking, looks like the SOX is in an ascending broadening formation. It's hard pin down this pattern because of a lot uncertainty intra-formation.
From here, IF this breakout follows through, I'm looking at the $195-$200 area as upside targets for a couple reasons:
1) Ideal Fibonacci extension of 61.8% puts price at $201 and the 41.4% extension level is at the $196 area. The 161.8% looks to be more likely as a top than the 141.4% area, at this point in time, due to the reason #2.
2) Upper trendline here is rising and I've taken the risk of cutting through a few candles at the peaks and using the gaps and gap fills as an alternative guide. This upper resistance aligns almost perfectly, not only with the 161.8% level of $200, but also with a rough estimate of the timing. By literally copy and pasting the solid green arrow (take with a grain of salt), using the same angle of ascent all the way to my upper trendline in purple would indicate a convergence of 3 different indicators around the same point in time and space. Assuming this continuation breakout follows through of course.
Fundamental uncertainty is high and unsurprisingly so is volatility, hence the wild broadening formation. The last week or so was the bears' chance to force a head&shoulders pattern, which would have been really bad news for SOX and the entire market. It still can be possible, without a doubt. However, it seems that we have just completed a triangle/bull flag indicating continuation. We got continuation and breakout today to end the week on a positive note for the long weekend, a psychological benefit imo.
The Bearish Argument:
Volatility is unpredictable, many tweets could be made over memorial day weekend. Volume isn't that high, but very slowly rising. Here's a few things to watch carefully in case of a fake breakout:
A) The breakout resistance around $186.50 needs to turn support (dashed red line) in the event that we see a retest. Dropping and holding below that could lead to an acceleration to the downside with or without a pause at the last resort support just below the $182 area (solid red line). This puts longer term downside potential in play if bears follow through.
B) Could be nice to take a large portion of profits at target 1 given uncertainty. Perhaps this would be a spot to consolidate or slow down before potentially seeing an exhaustion gap up to the peak of target 2. Ideal scenario though, watch any consolidations or resistances carefully and assess volume intraday. Pull profits periodically on huge surges up. Being inside this large broadening formation means that clear volume spike in either direction isn't gonna be likely on this trade. Large moves can happen on low volume and be easily reversed. Before reaching either target.
C) Fundamentally, watch QQQ and XLF related news. Both are looking to breakout of respective patterns but haven't yet. The markets as a whole tend to rally when both these tech and financial sectors are trending up at the same time. And also given geopolitics, I'm watching USOIL and XOP for big changes. Oil is coming off recent highs giving relief to the non-energy production sectors. Sudden moves could throw off any balance between sectors. And obviously, look at Chinese trade negotiations. It's so back and forth, on and off lately that it appears the market is giving up on listening to the developments unless some tangible and measurable actions take place. Which is exactly how the market gets blindsided when something does actually happen. I'm going to try to stay up to date with the news on trade closely even though it seems meaningless to do so.
Note
Good looking bounce from previous resistance so far! Markets seeing dramatic sell offs today, notably financials, as displayed by the XLF etf. The tech stocks, QQQ, is faring better than the wider markets today and SOXX semis are even better! That's a really good sign considering Semis and Tech stocks are feared to be much more overvalued than other sectors. Apparently that isn't the worry in today's trading though. A bounce back should prove lucrative for both the Chips and Techs.
Trade closed: target reached
Target 1 @ $195 Reached, topped out just under $196 and pulled back before bouncing slightly from above the peak of the first wave.Cashed out roughly 70% of my position now. If Friday's low of $190.36 holds tomorrow, I'll still be looking for a final move up towards the 2nd target although it's more a risk now than when I posted this chart. Trade tension increasing, nuclear summits going on. Sounding a lot like the late 1980's!
Trade closed manually
Chart isn't giving me confidence in more upside in the near future, closed my remaining position to add to a new trade on KRE and start rotating my capital out of tech and into financials for the short term as I i'm look for a potential pivot in those sectors coming up. Exited out of ADBE last week, shoulda held a bit longer but oh well, it needs to consolidate a bit, even after solid earnings beat today.Will likely post some XLF or KRE charts tomorrow given Fed rate hike.
Note
AMD starting to get volatile again and ended up dropping like a rock this afternoon... darling of the chip stocks recently can be a leading indicator perhaps? Watching to see how AMD NVDIA and MU close out the week.
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