This article was originally published on ETFTrends.com.
Semiconductors have taken a 12 percent hit thus far in May after leading the rebound following 2018's fourth-quarter sell-off debacle. According to TradingAnalysis.com founder Todd Gordon, the chips might be down, but it's an opportune time to buy the dip.
“The semis have led us on the way down,” said Gordon. “I think support has now been reached, and they are in a worthy spot of a low-risk, long setup here with a very clearly defined stop loss.”
“So, you have an old low back here, you’ve got the 50% retracement offering some support, plus we see a market that is beginning to stabilize,” added Gordon. “I think it’s a good opportunity to short ... expensive puts rather than buying expensive calls, so I’d like to set up a trade here, a short put with a protective long put below that is known as a put credit spread.”
Traders can take advantage using exchange-traded funds (ETFs) to set up similar tactical plays like the Direxion Daily Semiconductor Bull 3X ETF (SOXL) and the Direxion Daily Semiconductor Bear 3X ETF (SOXS) .
“What we want to happen here in this trade is, one, we’d like to see this bounce continue back up into this range here, and if that bounce continues, we’ll be right from a directional aspect,” he said. “But if we do get the bounce, you also see that implied volatility start to drop away. That will hurt the put that we’re short more than the put that we’re long. Net benefit is good for our trade.”
The sensitivity of semiconductor exchange-traded funds (ETFs) to trade wars was evident in funds like the VanEck Vectors Semiconductor ETF (SMH) and the iShares PHLX Semiconductor ETF (SOXX) as U.S.-China trade deal news continued to keep markets guessing.
The semiconductor sector can certainly lay blame on the recent trade war news. China responded to the latest tariff threats by U.S. President Donald Trump by promising to take “necessary countermeasures” if the Trump administration followed through on its threat to increase tariffs on Chinese goods, which they did:
- Category 1 (includes cotton, machinery, grains) went from 10% to 25%
- Category 2 (includes aircraft parts, optical instruments, certain types of furniture) went from 10% to 20%
- Category 3 (includes corn flour, wine) went from 5% to 10%
- Category 4 (includes certain types of chemical, rare earths, medical equipment like ultrasound and MRI machines) stayed the same at 5%
"Semis are starting to roll over. Technology is definitely showing some outflows," said Mark Newton, technical analyst at Newton Advisors. "For me that signals people are exiting technology and it's really not the right place to be."
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