Last week I wrote about the nice short setup in semiconductors, with a clearly defined risk stop at an important level. Let's look at the chart of the SMH (Semiconductor Holders Trust) ETF: When SMH found resistance at the 50 day moving average (yellow line) and started moving lower it looked like a classic 50% fibonacci reversal setup for a trade to the short side that could have led to a target price of around $31.50. With yesterday's announcement of TI acquring National Semiconductors for a huge premium, this short-side setup might be off the table. On a daily close above $35.10 and hence above the 61.8% retracement line as well as the 50 dma, I will consider a long trade. Above $35.10 would also mean a nice technical pattern got broken…and the saying about fast moves coming from failed moves would come to mind.
Less technically speaking, the semiconductors along with the financials have been lagging the overall stock market. The way I look at it is that should the semiconductors and fins start participating, the rally in the SPX could have further legs.
In full disclosure, I did not enter the SMH trade to the short side last week. My rationale was that with the overall market making such strong moves to the upside, it would be easier for two groups of stocks to start participating than the other way around. Better lucky than smart? Potentially. But that sometimes is part of it as well.