The PHLX Semiconductor Index (SOX) has reached long-term Elliott Wave targets and psychological resistance at $1000, raising the odds the powerful uptrend off the 2008 bear market low is coming to an end. While the instrument has held rock solid so far in 2017, key components including Intel, Corp. (INTC) and NVIDIA, Corp. (NVDA) are raising red flags, telling shareholders to take profits, reduce position size and/or tighten stops.
Admittedly, it will take months or longer to confirm a secular downtrend, given straight up price action since February 2016. That relative strength has lifted the index more than 400-points without a pullback, which sounds exceptionally bullish at first glance. However, the final waves of multi-year uptrends often unfold at a parabolic trajectory, drawing in the last supply of buyers, who are then left holding the bag in a major downturn.
SOX Weekly Chart (2007–2017)
The Elliott 5-Wave rally pattern that began at the 2008 low has fulfilled nearly every characteristics of a completed uptrend. For starters, the third and fifth waves are nearly identical in length, with a much shorter first wave. Second, the fifth wave has exceeded nearly all Fibonacci targets and has just passed the 2.000 extension of the fourth wave. Third, the fifth wave has unfolded at a parabolic angle, consistent with an uptrend ready to flame out in a final climax.
The recent buying spike into the psychological $1000 level offers another argument for a long-term top. The index crossed the magic number for the first time on March 15, and rolled over into quarter’s end, dropping into its first test at the 50-day EMA since December 2016. This could signal the opening shot of a multi-month testing process, similar to price action seen repeatedly on strong stocks hitting $100 for the first time.
INTC Weekly Chart (2007-2017)
Intel has failed to reward long-suffering shareholders despite the biggest bull market in history. It even failed to attract buying interest after the November election when the broad stock universe headed straight to new highs. The chip giant’s perennial weakness could signal much lower prices in coming months, especially when the weight of profit-taking hits the sector’s broad leadership.
The stock bounced to $37 after the September 11th attacks, with that price level ending multiple breakout attempts in the last 15 years. A 2014 reversal found support in the mid-20s in August 2015, ahead of a recovery wave that reversed at the big barrier once again in October 2016. It’s been congesting in a narrow range pattern since that time but has now dropped into a test at the 200-day EMA, with a breakdown through $34.50 ready to unleash a fresh wave of sell signals.
NVDA Daily Chart (2016–2017)
NVIDIA emerged as a market and big tech leader in 2016, taking off in a vertical trend advance in reaction to the huge growth potential of virtual reality gaming. It may have topped out at the end of 2016 after rallying into triple digits and dropping into a consolidation pattern that’s still under development, more than three months later. Shareholders anxiety has escalated during this time, setting of a distribution wave that’s dropped On Balance Volume (OBV) to a 4-month low.
More ominously, a slide into the lower-90s will complete a head and shoulders topping pattern, with a breakdown generating a measured move target in the upper-60s. It’s instructive to note a decline into that level would reach the 20-month SMA and fill the November gap between $71.50 and $79, while sharply lowering complacency which has plagued the stock in recent months.
The Bottom Line
Chip stocks have led the broad tech advance in recent years but Elliott Wave analysis may be signaling an impending top that ends the sector bull market, ahead of a downtrend lasting several years at a minimum.
<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>