These two high-profile chip stocks look overextended, says Katie Stockton
Semiconductor stocks have been a source of upside leadership for the market since the April low, noting the Philadelphia Semiconductor Index (SOX) has outperformed the S & P 500 Index (SPX) by over 20% over that period. However, high-profile semiconductor stocks now look overextended, which suggests the market is at risk of losing a primary source of leadership. Earnings from Broadcom (AVGO) were not received well last week, with the stock gapping lower Friday. The downmove confirmed a short-term counter-trend 'sell' signal from the DeMARK Indicators, in addition to downturns in both the daily stochastic oscillator and MACD indicator. The set-up supports a deeper pullback over the next 2-4 weeks. Initial support from the 50-day moving average (MA) is near $204, about 17% below current levels. The earnings driven sell-off may prove to be an intermediate-term setback for AVGO since it resulted in an unconfirmed breakout, leaving resistance intact from the December high near $252. Intermediate-term overbought conditions are in place, so a pullback has the potential to generate a 'sell' signal in the weekly stochastic oscillator. From a long-term perspective, AVGO is in a cyclical uptrend above support from the weekly cloud model near $197, but long-term momentum has waned to suggest AVGO is moving into a trading range with resistance intact. Like AVGO, semiconductor industry bellwether Nvidia (NVDA) shows signs of upside exhaustion from the DeMARK Indicators, supporting a near-term retracement following an underwhelming earnings reaction. The 50-day MA is similarly about 17% below current levels. Long-term momentum has weakened behind NVDA, and a pullback would give the stock the appearance of a bearish head-and-shoulders pattern. —Katie Stockton with Will Tamplin Access research from Fairlead Strategies for free here . 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