SPY and QQQ remain in long-term uptrends, but three big negatives are currently hanging over the stock market. Two negatives are tied to important cyclical groups and the third is reminiscent of summer 2022. The semiconductor business is cyclical and the Semiconductor ETF (SOXX) is one of the weakest industry group ETFs. Housing is an important part of the domestic economy and the Home Construction ETF (ITB) broke down. On top of this, the 10-yr Treasury Yield is breaking out and appears headed back to 5%, just as it did in summer 2022. The charts below tell the story.  

The Semiconductor ETF (SOXX) remains in a long-term downtrend. The chart below shows SOXX breaking down in July, forming a rising wedge into October and breaking wedge support at the end of October. Notice how this wedge retraced around 61.8% of the July decline and met resistance near the July support break. This advance was a counter-trend bounce and the wedge break signals a continuation lower. This is negative for semis, and by extension, the Technology sector and QQQ.

We recently covered weakening breadth and oversold conditions in two breadth indicators. These indicators could remain oversold. As such, we are setting bullish thresholds to distinguish between a robust bounce and a dead cat bounce. Click here to take a trial to Chart Trader and get two bonus reports!

The Home Construction ETF (ITB) failed to hold its late November breakout and reversed its long-term uptrend this month. ITB surged in November with a momentum thrust, similar to the July breakout. The July breakout held and ITB hit new highs in mid October. The November breakout, in contrast, failed as the ETF broke support and the 200-day SMA in December. ITB is in a long-term downtrend, which is negative for housing, and by extension, the Consumer Discretionary sector and the broader market.  

The 10-yr Treasury Yield is on the rise as it broke out of a 13 month falling channel, which was in place since November 2023. This breakout targets a move toward the October 2023 high around 5%. The chart below shows the falling channel extending from October 2023 to December 2024. TNX hit the upper line in late November and fell rather sharply into early December. The yield firmed in the 41-42 area (4.1%-4.2%) as a falling flag took shape. TNX broke out of the flag on December 11th and followed through with a channel breakout this week. This move reverses the long-term downtrend and argues for a higher 10-yr Treasury Yield. Much like summer 2022, this could weigh on stocks.

Even though SPY and QQQ are still in long-term uptrends, this negative trifecta will likely weigh on the market. Small-caps and mid-caps were slammed this week and breadth has been deteriorating for a few weeks. Our breadth models at TrendInvestorPro have yet to signal a bear market, but we will watch them closely in the coming days and weeks.

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Nearly all of our charts currently show deeply oversold conditions. While this is usually a good thing, in a market downturn, it isn’t necessarily your friend. As you can guess, we believe that Wednesday’s big decline was the beginning of something more serious. But the question is, “what about oversold conditions?”

One of the Bear Market Rules that we have is this:

Oversold conditions in a bear market — “thin ice”, no solid foundation for price bounces. Bounces can be bull traps.

Now for certain, we aren’t in a bear market (yet), but we have experienced a serious decline that could lead to more. We are certainly susceptible to a bull trap. How oversold are our indicators? Here are the numbers as of the close on Thursday:

The Swenlin Trading Oscillators have reached deeply oversold territory. However, we wouldn’t get overly excited by an upside reversal. Oscillators must oscillate and they want to be on the zero line. Notice that only 7% have price above their 20-day EMA and a mere 5% of stocks have rising momentum!

The ITBM and ITVM are also oversold. They haven’t hit extremes and could accommodate more downside at this juncture. The big problem on this chart is the very few PMO BUY Signals left in the index.

Finally our Bias chart shows the oversold conditions of %Stocks > 20/50EMAs. %Stocks > 200EMA could definitely see more downside as could the Golden Cross and Silver Cross Indexes. Both of those indexes are below their signal line giving us a BEARISH Bias in the intermediate and long terms.

Conclusion: Oversold conditions are welcome in a bull market or bull market move. The market is still near all-time highs and mega-caps could continue to hold things together, but our thought is that these weak internals are coming home to roost. If not now, then January. Watch out for bull traps!

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Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

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Semiconductors are at a crossroads, with innovation fueling growth and tariffs threatening profits.  How might you navigate this potentially volatile landscape and identify opportunities without getting burned?

In 2025, analysts predict AI will drive explosive demand in the semiconductor industry, fueling innovation and revenue growth. At the same time, this optimism is tempered by the new administration’s tariff policies, which threaten to disrupt global supply chains, increase costs, and reshape the competitive landscape for chipmakers.

This tug-of-war between bullish and bearish forecasts is best exemplified by the VanEck Semiconductor ETF (SMH) price action, a reliable proxy for the semiconductor industry. Here’s a weekly chart.

FIGURE 1. WEEKLY CHART OF SMH. Congestion narrowing within a wider trading range may indicate that bulls and bears are in temporary equilibrium, with neither buyers nor sellers showing enough conviction to drive a decisive breakout or breakdown. Chart source: StockCharts.com. For educational purposes.

There’s a narrowing, range-bound movement between its all-time high near $283 and the swing low of $280 (see blue dotted lines). The increasingly tight congestion range over the last three months, as highlighted by the magenta rectangle, suggests increased indecision among bulls and bears. Despite the temporary standstill, semiconductor stocks are outperforming their tech sector peers (see price performance against XLK) by only 29% and the S&P 500 by 51%.

While AI chip demand will likely see significant growth in the future, the effects of tariffs and reshoring may bring sharp and near-term pain to most chipmakers, particularly semiconductor companies that are most reliant on Asian production. Domestic chipmakers with minimal reliance on overseas manufacturing may fare better under these conditions.

With that in mind, let’s take a look at SMH’s top three holdings—NVIDIA Corp. (NVDA), Taiwan Semiconductor Manufacturing Company (TSM), and Broadcom Inc. (AVGO)—all of which play a leading role in AI chip development, but have different levels of reliance in the global chip supply chain.

FIGURE 2. PERFCHARTS COMPARING SMH AGAINST ITS TOP THREE HOLDINGS. Note the late jump in AVGO. Chart source: StockCharts.com. For educational purposes.

All three of SMH’s top holdings are outperforming their industry peers with NVDA on top, TSM second, and AVGO third. Understanding that late jump in AVGO might require some context (which we’ll get into later).

• NVDA is the world’s AI chip leader.
• TSM, is the world’s top chip foundry, and main producer of NVDA’s GPUs.
• AVGO is a diversified supplier of data center components which are the backbone of AI infrastructure. Unlike NVDA, its business model is less exposed to reshoring effects.

NVIDIA (NVDA): The AI Semiconductor Leader

Take a look at the rounding top pattern on the daily chart.

FIGURE 3. DAILY CHART OF NVDA. Rounding tops are bearish, but tend to break higher more than 50% of the time. Chart source: StockCharts.com. For educational purposes.

According to Thomas Bulkowski’s Encyclopedia of Chart Patterns, while rounding tops are typically viewed as bearish, more than half the time they break upwards, challenging that assumption. In many cases, the rim on the right is higher than the one on the left. In the case above, the rim is formed by a price bounce off the 100-day simple moving average (SMA). 

Both the 100-day and 200-day SMAs are likely to act as strong support unless there is a significant change in the chipmaker’s fundamentals. While NVDA’s uptrend remains intact, momentum seems to be weakening as suggested by the decline in the money flow index (MFI). Keep an eye on this development, especially if it breaks below the 100-day SMA and bounces off the 200-day SMA.

Next, let’s take a look at NVDA’s main chip foundry: TSM.

Taiwan Semiconductor Manufacturing Company (TSM): The Foundry

TSM’s daily chart doesn’t look too different from NVDA’s. Remember, TSM is NVDA’s main chip foundry, and so NVDA is highly dependent on TSM (rather than the other way around).

FIGURE 4. DAILY CHART OF TSM. The stock’s price is chugging along with plenty of support. Chart source: StockCharts.com. For educational purposes.

You can see the difference between the stock’s volatile rise in price against a gradual decline in the RSI. TSM’s recent price action over the last three months has succumbed to this drop in bullish momentum. 

The stock is reacting strongly to the 100-day and 200-day SMAs, suggesting a high likelihood of bouncing off these levels again should price continue to decline from the current levels.

Broadcom (AVGO): A More Diversified AI and Semiconductor  Play

Broadcom also uses TSM’s foundry services, but it has a few other foundries in Asia and Europe. Because of its wide range of products and its focus on data centers, AVGO is more diversified and less exposed to the same supply chain risks as NVDA. Perhaps this (plus the company’s optimistic 2025 revenue projection) is why its shares have recently outperformed the other two companies above, hitting an all-time high in late December. 

Let’s take a look at AVGO’s daily chart.

FIGURE 5. DAILY CHART OF AVGO. The December gap followed strong company guidance. Chart source: StockCharts.com. For educational purposes.

AVGO’s uptrend going back to November 2023 runs a similar course to NVDA and TSM. Its uptrend experienced some moments of volatility yet remained relatively sold. Its price fluctuations also reacted strongly to both the 100-day and 200-day SMAs, finding support with both.

However, unlike our previous examples, momentum as measured by the RSI appears steady and somewhat cyclical. To get a clearer view of momentum with volume, I added the On Balance Volume (OBV) with a 50-day SMA overlay which shows that buying pressure has steadily been increasing, fueling AVGO’s ascent, and culminating in the bullish jump in December.

Whether or not price falls to fill the gap, you might wait for RSI to dip below the 50-line to better time an entry if you’re looking to go long.

At the Close

The semiconductor industry faces a dynamic and uncertain 2025, with AI demand poised to spur growth while tariff talks threaten to reshape global supply chains and profit margins. Keeping an eye on SMH and monitoring its top holdings—NVDA, TSM, and AVGO—for shifts in momentum and action at key levels is critical if you’re looking to time your trades in this promising space. 

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

This week saw the fabled Hindenburg Omen generate its first major sell signal in three years, suggesting the endless bull market of 2024 may soon indeed be ending. Why is this indicator so widely followed, and what does this confirmed signal tell us about market conditions going into Q1? First, let’s break down the conditions that led to this rare but powerful bearish indicator.

Major Tops Tend to Have Consistent Patterns

Strategist Jim Miekka created the Hindenburg Omen in 2010 after analyzing key market tops through market history. What consistent patterns and signals tended to occur leading into these market peaks? He boiled it all down to three key factors which were consistently present:

1. The broad equity markets are in an uptrend
2. At least 2.5% of NYSE listings are making a new 52-week high and at least 2.5% are making new 52-week lows on the same day
3. The McClellan Oscillator breaks below the zero level

One final step involves observing these three conditions occur at least two times within one month. Looking at the chart, we can see that this completed Hindenburg Omen signal has only occurred three times since 2019: in February 2020, going into the COVID peak, in December 2021, just before the 2022 bear market, and in December 2024.

What strikes me about this initial look at the indicator is that from a technical perspective, 2024 and 2021 have been remarkably similar. Both years featured long-term uptrends with minimal drawdowns and low volatility.  So does that mean we are heading into another 2022 and a 9-month bear market for stocks? Not necessarily.

Trend-Following Techniques Can Help Improve Accuracy

Switching to a weekly chart, we can bring in much more history to consider. I’ve added red vertical lines to indicate any time we registered a confirmed Hindenburg Omen signal with at least two observations within one month.

Reviewing some of the recent market tops, we can see that this indicator did remarkably well in identifying topping conditions in 2021, 2020, and 2018. Going back even further, you’ll notice signals around the 2007 and 2000 peaks as well.  But what about all the other signals that were not followed by a major decline?

People have quipped that the Hindenburg Omen have “signalled ten out of the last five corrections,” referencing the “false alarm” signals that did not actually play out. I would argue that the key with indicators like this is to combine them with trend-following approaches, similar to how I approach bearish momentum divergences.

When I see a bearish divergence between price and RSI or observe any other leading indicators like the Hindenburg Omen flash a sell signal, it doesn’t tell me to blindly take action! What it does tell me is to be on high alert and look for signs of distribution that could serve to confirm a bearish rotation. By patiently waiting for confirmation, we can improve our success rate and take action only when the charts compel us to do so!

S&P 5850 Remains the Level to Watch

So where does that leave us in December 2024?  While Wednesday’s post-Fed drop certainly represented a significant short-term distribution pattern, the longer-term trends for the S&P 500 and Nasdaq 100 are still quite constructive.

The S&P 500 broke below its 50-day moving average this week for the first time since September. And while Wednesday and Thursday both saw the SPX close below the 50-day, Friday’s rally on improved inflation data took the major equity index right back above this key short-term barometer.

SPX 5850 has been my “line in the sand” since the November pullback, and as long as price remains above this threshold, I’m inclined to consider this market innocent until proven guilty. And given the normal end-of-the-year window dressing common with money managers, I would not be surprised if the Magnificent 7 stocks and other large-cap growth names remain strong enough to keep the benchmarks in decent shape into year-end.

But indicators like the Hindenburg Omen certainly have caused me to dust off the bull market top checklist, looking for signs of distribution that would imply further weakness. One of my mentors and long-time StockCharts contributor Greg Morris once quipped, “All new highs are bullish… except the last one.”  I’m wondering if that early December high around 6100 may be the last one for a while!

One last thing…

I recently sat down virtually with author and technical analyst Chris Vermeulen to discuss the benefits of following asset flows, the dangers of holding dividend paying stocks during bear markets, how to navigate a potential breakdown in crude oil and energy stocks, and how investing and surfing are more alike than you might think!

RR#6,

Dave

PS- Ready to upgrade your investment process?  Check out my free behavioral investing course!

David Keller, CMT

President and Chief Strategist

Sierra Alpha Research LLC

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.  

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

A smart investor listens to the stock market and this week’s stock market action was a perfect example of why this is important. 

It was a roller-coaster week in the stock markets leading many investors to quickly sell holdings when there was a big selloff and scramble to go long again on Friday when the broader stock market indexes turned higher. This is why it’s a good idea to always look at a longer time frame chart to get a sense of the long-term trend before making hasty decisions. 

If you pull up a weekly chart of any of the three major indexes you’ll see that the S&P 500 ($SPX) and Nasdaq Composite ($COMPQ) are trending higher. The Dow Jones Industrial Average ($INDU) is also doing the same but it’s just hanging in there by a whisker.

The Ups and Downs

Comments from Fed Chairman Jerome Powell on Wednesday sent investors into selloff mode which spilled over into Thursday. But Friday’s slightly lighter-than-expected November PCE may have reversed investor sentiment. The broader stock market indexes moved higher spreading some holiday cheer to an otherwise gloomy week. 

What made the market move higher? It doesn’t make sense to look for a reason for the reversal in sentiment. Remember, it’s best to listen to the market and follow along. That said, a few interesting data points are worth noting.

The Federal Reserve indicated their focus was on a cooling of the labor market in their last few meetings. However, Wednesday’s comments from Chairman Powell suggested that the labor market is doing fine now but the Fed’s focus has switched to inflation. That may have made investors nervous and triggered the massive selling we witnessed on Wednesday. Friday’s light November PCE may have been a sigh of relief that brought back the optimistic sentiment. 

Despite the optimistic sentiment, one important news we can’t lose sight of is the possibility of a US government shutdown. A shutdown doesn’t necessarily impact the stock market but there may be inconveniences such as a reduction in government services that may send ripples through the economy.

The Year-End Party

As 2024 winds down, there will likely be very light trading days but there are some important events that unfold at the end of the year. There’s the January Effect which is when small-cap stocks start rallying. Small-cap stocks got a boost post US election but since late November they’ve been sliding lower. The daily chart of iShares Russell 2000 ETF (IWM) shows the small-cap trend is still bearish. 

FIGURE 1. DAILY CHART OF IWM. Small cap stocks took a big hit in December. Look for the full stochastic oscillator to cross above the 20 level with some follow-through to confirm their seasonal rally. Chart source: StockCharts.com. For educational purposes.

The full stochastic oscillator is deep in oversold territory and a cross above the 20 level would be encouraging for small-cap stocks. But there needs to be follow-through for the small caps to have a bullish rally.  

In addition to the January Effect, there’s the eagerly awaited Santa Claus rally, which is supposed to start next week. Friday’s price action may have reignited the possibility of having Santa show up this year. But I wouldn’t hold my breath just yet. 

If you look at the daily chart of the S&P 500 below, you’ll see that the three market breadth indicators displayed in the lower panels had started declining in late November, which should have signaled that the market was ripe for a selloff.

FIGURE 2. S&P 500 HOLDS ON TO SUPPORT. Friday’s price action may look slightly bullish but it needs more follow-through to confirm a reversal. Chart source: StockCharts.com. For educational purposes.

What is concerning is that Friday’s price action didn’t change the market breadth narrative. So even though Friday’s rise was sizeable, with a bullish engulfing pattern that closed at the 50-day simple moving average, I wouldn’t rush to buy the dip just yet and certainly not on triple-witching Friday. For all you know, there could have been some short-covering going on. I’ll need to see more follow-through of the upside move before adding more positions to my portfolio. At least the S&P 500 stayed above the support of its mid-November lows.

The daily chart of the S&P 500 Equal Weighted Index ($SPXEW) vs. the S&P 500 gives you an idea of how dominant the heavily weighted stocks influence the index.

FIGURE 3: S&P 500 VS S&P 500 EQUAL-WEIGHTED INDEX. The less-heavy weighted stocks in the S&P 500 are lagging the S&P 500. The equal-weighted index is trading below its 100-day moving average and has a long way to go before re-establishing its uptrend. Chart source: StockCharts.com. For educational purposes.

$SPXEW is trading below its 100-day SMA. Note that Friday’s high came close to the 100-day SMA. A close above the 100-day SMA would be the first sign of a trend reversal in the equal-weighted index. But one day’s action doesn’t make a trend. A series of higher highs and higher lows needs to be established before a trend has indeed reversed. It would be more confirming if the non-Mag Seven stocks showed signs of catching up with the big S&P 500 index.

Volatility Pulls Back 

One encouraging point to end the week is the Cboe Volatility Index ($VIX) closed below 20 (see chart below). Investors were getting so complacent towards the end of November but if you had noticed the VIX creeping higher, you’d have seen the selloff coming. 

FIGURE 4. DAILY CHART OF THE CBOE VOLATILITY INDEX ($VIX). The VIX was at very low levels from November but it slowly started moving higher signaling that investors were getting fearful. This led to Wednesday’s spike. Chart source: StockCharts.com. For educational purposes.

The pattern in the chart of the VIX shows that a similar pattern occurred from June to July, right before the August spike. Could a similar scenario unfold this time?

The Mark Twain quote, “History doesn’t repeat itself but it often rhymes,” explains it so well. So as you navigate the stock market, listen to the rhythm and follow its lead. 

The bottom line: Set up your Dashboard panels on the StockCharts platform and get a bird’s eye view of the stock market.

End-of-Week Wrap-Up

• S&P 500 down 1.99% for the week, at 5930.85, Dow Jones Industrial Average down 2.25% for the week at 42,840.26; Nasdaq Composite down 1.78% for the week at 19,572.60
• $VIX up 32.95% for the week, closing at 18.36.
• Best performing sector for the week: Technology
• Worst performing sector for the week: Energy
• Top 5 Large Cap SCTR stocks: Applovin Corp. (APP); Palantir Technologies (PLTR); Reddit Inc. (RDDT); Astera Labs, Inc. (ALAB); MicroStrategy Inc. (MSTR)

On the Radar Next Week

• November Durable Goods Orders
• November New Home Sales
• October S&P/Case-Shiller Home Prices

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.