Be Cautious of the Semiconductor Breakout

By | August 30, 2017

The semiconductor sector as represented by the VanEck Vectors Semiconductor Index ETF (SMH) is breaking out of a large symmetrical triangle formation, but there are several technical indications that suggest caution.

First, breakouts that occur near the apex of a triangle or wedge usually do not have the momentum or sustainability of breakouts that occur before the pattern is 75% complete. In the case of the SMH the break is occurring much closer to the projected apex of the triangle.

A second warning sign is the distinct lack of overall volume. Volume is what powers and sustains a breakout move and the volume levels on the chart, at this point in time, are weak and well below the 50 day moving average of volume.

Finally, money flow as a percent of overall volume does not reflect any improving buying interest. These technical volume and money flow levels could change but they will need to do so quickly and improve significantly to energize the move.

A very preliminary assessment of the SMH chart as it is currently configured suggests that this breakout is likely to fail, or at best require retesting and improvement in volume and money flow.

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