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<\/p>\nAI is the hottest trend in the market right now.<\/p>\n
Investors have piled into stocks like Nvidia (NVDA), Taiwan Semiconductor (TSM), and Broadcom (AVGO) all year.<\/p>\n
These are just a few of the companies that traders think will benefit the most from the AI craze. So far, they’ve been right. They take up a good chunk of the VanEck Semiconductor ETF (SMH).<\/p>\n
SMH has been on a blistering rally since May of this year. It’s up 18%.<\/p>\n
But before you decide to buy into this rally now, be aware. My analysis shows the trend for semiconductor stocks is about to end…<\/p>\n
Right now, the price charts show trouble ahead.<\/p>\n
Whenever a market takes off, a lot of folks fall victim to FOMO (fear of missing out).<\/p>\n
Seeing a stock trade higher and higher is just flat-out painful. Eventually, ill-disciplined traders (or investors) cave in and decide to buy… often at exactly the wrong time.<\/p>\n
This is how you get parabolic moves (when a stock trades up in a straight line). But this requires traders to keep buying high, thinking they can sell at even higher prices for a profit.<\/p>\n
Eventually, folks get nervous or realize that the stream of people willing to buy the stock is slowing down and they start selling. This can cause a panicked rush to sell.<\/p>\n
The good news is that the warning signs are almost always there ahead of time.<\/p>\n
The current chart of SMH is a great example. There’s a powerful reversal pattern that’s very close to triggering.<\/p>\n
Let me show you on the chart below:<\/p>\n
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Two important things are going on with this chart.<\/p>\n
First is the head and shoulders pattern that began taking shape back in June.<\/p>\n
The head and shoulders is a classic reversal pattern that has three components: the left shoulder, the head, and the right shoulder. You can see these parts labeled on the chart.<\/p>\n
Once the right shoulder is complete, you can draw a line connecting the bottoms of the left and right shoulders. This is known as the neckline of the pattern.<\/p>\n
The pattern is complete once prices break below the neckline. Afterward, you can expect to see a swift, sharp sell-off.<\/p>\n
The second important feature is known as bearish divergence. Bearish divergence occurs when prices continue to make new highs, but the Relative Strength Index (RSI) starts trending lower.<\/p>\n
SMH didn’t peak until July 28. But the RSI actually put in its top on May 31. This is a sign of underlying weakness in the market.<\/p>\n
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Free Trading Resources<\/strong><\/p>\n Have you checked out Jeff’s free trading resources on his website? It contains a selection of special reports, training videos, and a full trading glossary to help kickstart your trading career \u2013 at zero cost to you. Just click here<\/a> to check it out.<\/p>\n<\/p><\/div>\n<\/div>\n <\/p>\n Chart patterns are always stronger when paired with a technical indicator like bearish divergence.<\/p>\n Trimming some exposure to the sector, or even playing the short side, are both valid options. It depends on how aggressive you are as a trader or investor.<\/p>\n Either way, it’ll be important to keep an eye on SMH over the next few trading sessions. Because if you’re thinking about buying, my advice is don’t… not yet, anyway. A better opportunity is likely not far off.<\/p>\n Happy trading,<\/p>\n Imre Gams<\/p>\n <\/p>\n