I have been watching the recent gyrations on the semiconductors for a while now and potentially think the SOX could well offer a clue to supporting the next likely move on the broader markets. Initially, I thought the move into the April 2019 high was all of wave 5, however, the continued upside is potentially now suggesting the overall move from the Dec 2018 low is developing as an ending diagonal, many technicians refer to this pattern as a bearish rising wedge.

One of the reasons I like the ending diagonal idea is the RSI appears to confirm the idea, the divergence that is building up very noticeable and aligns well with the ending diagonal pattern. As with all ending diagonal patterns, they have a nasty habit of morphing into a larger pattern, so whilst the internal waves are potentially in place, it may still try and squeeze to a new high if any weakness fails to move aggressively below 1500 – 1480.

If the idea is correct and the SPX/SMH are ending an ending diagonal for wave 5 of a larger impulse wave from the 2008 lows, then a strong decline is setting up. A reversal may already be in place based on the weakness we saw last week on some semiconductor stocks such as TSM and INTC.

An initial decline in 5 waves, followed by a partial retracement in 3 waves would be the first clue to support a move lower. The key I feel is to see the larger weighted stocks in SMH reverse and move lower, as without any weakness in the larger semiconductors stocks I doubt the SOX/SMH is going to breakdown.

Looking at the top ten stocks based on the weighting in the SMH, it’s clear the two standout stocks that traders should watch are TSM and INTC.

The wave count on TSM looks a particularly clear pattern, especially the recent move to the upside, it seems that TSM has been the recent driver of the SOX/ SMH upside, as many other semiconductor stocks are showing weakness compared to TSM. If TSM has ended a terminal thrust from a triangle, then a strong move lower is likely to put pressure on the SOX/SMH.

TSM

The spike to the upside appears as a terminal 5th wave of an impulse wave, If that idea is correct, then a strong move lower should coincide with a move lower on the SOX/SMH, seeing as its the biggest weighted stock in the SMH its important to watch, a move lower on both TSM and INTC should see further weakness and put pressure on the semiconductor stocks.

Last week’s candle sure appears to be a bearish reversal.

If you overlay the SPX and SOX, you can see similar price action from the Dec 2018 lows. So if the SOX was to breakdown as I am suggesting, then I favor the rest of the broader markets move lower, although at this stage the ending diagonal idea is a speculative idea, as we don’t have any strong evidence to confirm that the ending diagonal pattern on the SMH/SOX is indeed correct. There is a more bullish option which implies a very strong rally to the upside, but at this stage, it’s not an idea I am strongly favoring, I want to see the market negate the potential ending diagonal idea as shown above.

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