We are always on the lookout for chart patterns. Recently, we’ve 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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