Stocks got crushed yesterday as issues with Italy’s government made their way around the global equity markets. The selling pressure was also aided after additional tariffs were announced by the U.S. on Chinese imports. All three of the main indices suffered significant losses, but the Nasdaq held up better than the other two. By the end of the day the Nasdaq lost 0.50%, the S&P lost 1.16% and the Dow lost 1.58%.
Nine of the ten main sectors lost ground yesterday, but the financial sector got hit the hardest with a loss of 3.41%. Materials (-1.78%), industrials (-1.57%) and healthcare (-1.00%) were the other three sectors that lost one percent or more.
[hana-code-insert name=’adsense-article’ /]The utilities sector was the only one in positive territory with a gain of only 0.01% as investors were seeking safety.My scans extended their streak of predominantly bearish signals to 15 straight days.
There were 44 names on the bearish list last night and only six on the bullish list.
The barometer moved down to a reading of -26.2.
Among the names on the bearish list were a handful of semiconductor companies and the VanEck Semiconductor ETF (NYSE: SMH).
Most of the companies have decent fundamental numbers, but not all chip companies do. With that in mind, it was the pattern in the chart that caught my eye.
What we see on the chart is a classic head and shoulders pattern. The first shoulder was established at the $108 level in January and the other shoulder is setting up right now. The neckline was established with the trips down to $96 in February and April. The head part of the pattern is at the high in March. For the pattern to complete itself the stock will drop again and this time it will dip below the neckline.
Buy to open the Jul18 $110-strike puts on SMH at $5.00 or better. These options expire on July 20. For these options to double the fund will need to drop to $100 or less and that is above the neckline of the head and shoulders pattern. I would set a target of 100% for the gain and I would use $110 as a stop-loss point.
— Rick Pendergraft
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