Trading The Semiconductor Technicals
Gregory W. Harmon | Mar 26, 2015 04:10PM ET
Coming into this week, semiconductors looked great, ready to break out to the upside and make long holders a good bit of money. Well we know how that worked out. Almost right out of the starting gate Monday they started falling -- strong, bearish Marubozu candles Monday, followed by longer ones Tuesday and Wednesday.
Taken together, the 3 form a bearish, Three-Black-Crows candlestick pattern, indicating a reversal and a continuance lower.
But that pattern doesn't tell us how just much lower. And with a further drop on Thursday, many names are forming Hammer candles. These are possible reversal candles for a move higher. So, Three Black Crows tell us to expect more downside, which will last for about 4 market hours? Technically, that still fits the definition. Very confusing, right?. Just last night many were ready to sell everything and go short. Now there's a possible reversal? Isn’t the stock market fun?
Well, here is a low risk way to take a stab at that turn around without losing your shirt. One of the names I was watching was On Semiconductor (NASDAQ:ONNN). It was running toward resistance Friday, but printed one of those Three-Black-Crows patterns, followed by a Hammer on Thursday. What makes the possibility of a reversal a bit more interesting is that it reversed intraday at the 50-day SMA and is well below the lower Bollinger Band®.
For the more skittish, one way to trade a possible reversal is through the options market. Risking just 2.5% of the stock price ($11.69) you can buy the April 12 Calls (30 cents). If the reversal happens, you make money as it rises and, penny for penny, as the price moves over 12.30. If it falls, the most you can lose is the premium you paid.
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