ALERT! - SMH Update - November 29, 2017

Cerundolo Investment Research    


Volume 1, Issue 1
November 29, 2017

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The SMH was down 4.94% today which is the largest one-day “range expansion” since the 6.3% decline we had in June of this year. Think of range expansion as a “momentum burst” where the range for the current time frame exceeds the range for the same time frame in like periods. Here we are looking at the “one-day" move. The XLF is currently experiencing that same “momentum burst” on the upside vs. the SMH on the downside.

In June, the SMH was 17 % above its 200-day moving average, and this last high marked the index at 18% above its 200 day. Typically, large one-day “range expansion” moves such as this marks a “shot across the bow” and an alert to a shift in the prior trend. In the case of the financials, we have examples such as BAC where a “sideways range” is followed by a “momentum burst” to the upside which is very positive. Clearly, these are moments to be on alert.

In our October report, we highlighted the strength in XLF and SMH and noted that the SMH did have good bullish momentum with an upside MFU-4 target of $102. This long-term target was generated from the large base pattern from the low of 2009 and which went slightly above that target to $105 recently. When we come into these zones such as a MFU-3 or 4, one should be on alert for a pause/pullback to occur. Today’s impulsive move down does signal a near-term shift in capital flow and caution going forward.

Today’s low was halted at the 50-day average and generated a short-term oversold condition which would warrant a short-term bounce. As we saw in June of this year, that bounce was short-lived, and the index had further weakness. The same is expected here.

Avoid buying this “pullback”. With such a wide deviation to the long-term 200-day average and with the MACD momentum indicator clearly showing weakness. This may turn out to provide a good buying opportunity in the near-term, but not right now.

Happy to help with specific names in this space.