U.S. Commerce Secretary Wilbur Ross's 90-day Huawei reprieve, allowing the Chinese tech giant to buy equipment from U.S. suppliers, flipped the prevailing market dynamic dramatically: chipmakers jumped after the announcement. Indeed, the surprise move is expected to catapult the Philadelphia Semiconductor Index higher — at least for now.
Before that, chipmakers faced a harsh reality as the trade war exacerbated pre-existing pricing and inventory woes. But all that seemed to change in a single statement.
Last year Huawei bought about $11 billion worth of chips and other components from U.S. companies like Qualcomm (NASDAQ:QCOM) (NASDAQ:QCOM) and Intel (NASDAQ:INTC) (NASDAQ:INTC), or about 16% of the $70 billion of its global purchasing. It would be a reasonable assumption to expect that Huawei will buy as much as it can from U.S. companies during the 90-day reprieve.
And though the trade war seems far from over, and the U.S. could be sucked into a global slowdown, the short-term dynamics appear to have reversed, and are now trending higher.
SOX Daily Chart
The semiconductor index has been consolidating within a pennant shaped pattern, expected to be a continuation pattern. A downside breakout would have extended the 13% plunge from its record high on July 24 to the Aug. 5 low.
The presumed environment is that the market is catching its breath as it waits for clues to the next move, with the underlying assumption that the short-term downtrend will resume once profit-taking is out of the way. The downside breakout would have extended the decline from the short-term uptrend line since June, pushing the index below its December bottom to join the major indices, which had already failed their respective uptrend lines of the same period.
However, the Huawei reprieve has turned that on its head, sending short sellers scurrying to cover shorts and going long. This reverse in mid-drive caused an upside breakaway gap from the pennant, now expected to serve as a technical support.
While we don’t know how long this dynamic will last, it would be reasonable to expect Huawei to dramatically increase demand on U.S. chipmakers and that the psychological reversal would carry prices up to test the July all-time highs of $16,24, another 7% advance.
Trading Strategies
Conservative traders would wait for new highs to trust the uptrend.
Moderate traders might wait for evidence of support above the pennant, with at least one long, green candle engulfing a red or small candle of either color, after bouncing off the pennant.
Aggressive traders may enter a trade at will, after calculating risk and reward and ensuring they can absorb the risk.
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