There's a tendency to watch for what something can do, to determine its technical bias. But at potential turning points, what something can't do is often more meaningful.
There's a Wall Street saying that there's nothing more bullish than a record high. And on Thursday, the iShares Semiconductor ETF SOXX shot up 6.6% to a second record close in the past week, and the fourth record this month, despite concerns over valuations after a 112% run up this year.
While that suggests the sector's outlook remains rosy, there are some technical readings below the surface that indicate momentum has been leaning toward the bears for the past couple months, and appears to have made the switch this past week despite the price gains.
The Relative Strength Index, which oscillates between zero and 100, is a widely followed underlying technical indicator that measures the magnitude of recent gains against the magnitude of recent losses. This is momentum tracker that many use to first determine whether a charted instrument becomes overbought or oversold.
When the RSI rises above 70, it is viewed as depicting an overbought condition. That means something has rallied at a much faster pace than historical norms, enough to suggest a pullback is necessary to allow bulls to catch their breath.
But history also shows that "overbought" can be more of an ability than a condition. Something can't rally enough to become overbought without strong and broad demand.
For the SOXX, there are a couple RSI developments that warn bulls are now running on fumes.
First, RSI shot up to a 15-year high of 85.73 on April 24, according to FactSet data, after the SOXX rocketed 49% amid an 18-day win streak to close at record high. But since then, as the SOXX kept rising, RSI kept putting in lower highs and lower lows, which many chart watchers say defines a downtrend.
That's a pattern referred to as "bearish technical divergence." What it suggests is each rally is sapping more and more strength from the bulls. While it's not necessarily a good market-timing signal, as technical divergences can last for months, it warns that the likelihood of a swing to bearish momentum is growing.
Despite the continued climb to new highs, the SOXX has suffered five down days over the past 11 sessions. "Momentum is clearly waning," BTIG technical analyst Jonathan Krinsky wrote in a recent note to clients. "If nothing else, volatility is starting to become more two-sided."
It might not seem like much, but the bearish technical signal that shows the tide has now turned is that RSI peaked at 66.16 on June 15 and ended the week at 64.43. So despite the SOXX closing June 15 and Thursday at record highs, RSI not only failed to reach overbought territory, it actually declined.
And recent history suggests that's a bad sign.
There was a similar development earlier this year, where the SOXX rose to a record close of 368 on Feb. 25, up from the previous record 361.13 on Jan. 29, but RSI could only make it back to 64.20 on Feb. 25 after reaching 73.65 on Jan. 29.
The SOXX sank 15.8% over the next month.
There was also the time in late 2021, when on Nov. 9 the SOXX matched a record close of $174.42 on the heels of a nine-session, non-loss streak - it was unchanged on Nov. 9 - and RSI peaked at 81.49.
While the SOXX kept rising to a record close of 185.21 on Dec. 27, RSI kept trending lower and could only reach 62.28 that day.
Prices turned lower the next day, and didn't bottom until the SOXX lost 46.2% to close at 99.56 on Oct. 14.
Keep in mind these technical developments don't guarantee a selloff, and aren't meant to suggest how much something might fall. But BTIG's Krinsky said "a near-term shakeout" back to the 50-day moving average "remains a high risk."
The 50-DMA is a short-term trend tracker that extended to $508.14 on Thursday, according to FactSet. That's 20.5% below where the SOXX ended the week.
Comments