I have been watching the recent gyrations on the semiconductors for a while now and potentially think the SOX could well offer a clue to supporting the next likely move on the broader markets. Initially, I thought the move into the April 2019 high was all of wave 5, however, the continued upside is potentially now suggesting the overall move from the Dec 2018 low is developing as an ending diagonal, many technicians refer to this pattern as a bearish rising wedge.

One of the reasons I like the ending diagonal idea is the RSI appears to confirm the idea, the divergence that is building up very noticeable and aligns well with the ending diagonal pattern. As with all ending diagonal patterns, they have a nasty habit of morphing into a larger pattern, so whilst the internal waves are potentially in place, it may still try and squeeze to a new high if any weakness fails to move aggressively below 1500 – 1480.

If the idea is correct and the SPX/SMH are ending an ending diagonal for wave 5 of a larger impulse wave from the 2008 lows, then a strong decline is setting up. A reversal may already be in place based on the weakness we saw last week on some semiconductor stocks such as TSM and INTC.

An initial decline in 5 waves, followed by a partial retracement in 3 waves would be the first clue to support a move lower. The key I feel is to see the larger weighted stocks in SMH reverse and move lower, as without any weakness in the larger semiconductors stocks I doubt the SOX/SMH is going to breakdown.

Looking at the top ten stocks based on the weighting in the SMH, it’s clear the two standout stocks that traders should watch are TSM and INTC.

The wave count on TSM looks a particularly clear pattern, especially the recent move to the upside, it seems that TSM has been the recent driver of the SOX/ SMH upside, as many other semiconductor stocks are showing weakness compared to TSM. If TSM has ended a terminal thrust from a triangle, then a strong move lower is likely to put pressure on the SOX/SMH.

TSM

The spike to the upside appears as a terminal 5th wave of an impulse wave, If that idea is correct, then a strong move lower should coincide with a move lower on the SOX/SMH, seeing as its the biggest weighted stock in the SMH its important to watch, a move lower on both TSM and INTC should see further weakness and put pressure on the semiconductor stocks.

Last week’s candle sure appears to be a bearish reversal.

If you overlay the SPX and SOX, you can see similar price action from the Dec 2018 lows. So if the SOX was to breakdown as I am suggesting, then I favor the rest of the broader markets move lower, although at this stage the ending diagonal idea is a speculative idea, as we don’t have any strong evidence to confirm that the ending diagonal pattern on the SMH/SOX is indeed correct. There is a more bullish option which implies a very strong rally to the upside, but at this stage, it’s not an idea I am strongly favoring, I want to see the market negate the potential ending diagonal idea as shown above.

The current bounce appears to be suggesting a 4th wave of an impulse wave is likely in progress. We need to see 9 swings for an impulse wave with one extended wave, so the better look and preferred idea is to see a new low for both the Sensex and Nifty. A move back below 37000 is needed to support further weakness for wave [d] of the triangle idea.

The alt idea for wave 4 is to see a bit more upside towards 37800, to end a 3 wave bounce from the Aug lows followed by new lows under 36000 to end wave 5 and complete a large impulse wave from the Jun 2019 highs, it’s then I would suggest investors could look to turn bullish as a large rally in 3 waves to correct the current decline would be expected to develop from below 36000.

Sensex

Nifty

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We have been closely watching for the end to an upside corrective bounce from the Aug 2019 lows, the same look can be seen on many other European markets such as the Cac 40 and Euro Stoxx 50. Last weeks high could be enough to suggest the upside has ended, although until we see either an impulsive decline below 11800, then we can still allow for a bit more upside.

As long as any further upside remains below 12650 then we are going to stay bearish and target more weakness and continue to look for a move below 10000 and retest the Dec 2018 lows.

Staying bearish below 12650.

Before

After

European traders that are actively trading the FTSE, CAC or DAX, should take note of the look from the mid-August lows. If the bounce remains in 3 waves, then it can set up for a move lower, you can cross-reference most of the major European markets such as the AEX or Euro Stoxx 50, they too are showing the same 3 wave looking rally at the moment. If that remains, and the current upside holds below their respective Jul 2019 highs, then it can set up for a move lower.

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The high into yesterday can be counted as the end of a double zigzag correction from the lows made at 25339. However in order to see a move lower and suggest the recent upside has ended, a strong move back below 26099, then 25952 is needed.

If it continues to hold above yesterdays low at 26099, then there is still scope for a move higher towards 26400 – 26600 before it ends wave [y] and completes what appears to be a double zigzag correction from 25339.

Remains bearish below 27398.

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The move from the Jul 2019 lows appears to be developing as an impulse wave (5 wave rally), a new high still appears to be needed, so I favor we still see minor new highs on both ZB and ZN. Whilst TLT remains above $136.00, I still think one more high can be seen, it’s then it can potentially offer a bearish setup for a move lower.

As TLT and ZB move to a new high, TYX is expected to make new lows to end the 5th wave of an impulse wave from the Jul 2019 high (2.67%). Expect the media to freak out, a rally on TYX (yields move higher) can develop from new lows.

TLT

TYX