Yielding to a Chipwreck: Why Late April is Key for This Market

Semiconductor stocks capsized on Thursday after a warning from the world's largest contract chipmaker, Taiwan Semiconductor Manufacturing (TSM).

TSM cut its revenue target to the low end of forecasts because of weak smartphone demand. At the same time, oil broke out to new 4-year highs on Wednesday.

TSM's miss sunk AAPL and weighed heavily on the tech sector.

AAPL's Breakaway gap yesterday after tagging the low of the high bar day threatens to install a bearish right shoulder.

Tech leads the market, and semis lead tech. Yesterday's tape was testimony to this idea.

TSM ripped below its 200 day moving average for the first time since January 2016.

Technical analysis works: TSM triggered my Rule of 4 Sell strategy on Tuesday.

Despite 'tailing' back up on Wednesday, TSM was telegraphing lower prices.

On Thursday TSM shattered a larger trendline from December.



Is the Tech Sector about to crash into the TSM iceberg, Titanic-style?

A weekly SOX from January 2016 shows that Thursday's semi-conductor crack-up did not come out of the blue.

Technically, gray skies were looming prior to the Thursday's chip downpour.



Directly off an all=time high signal week reversal on the week of 3/12/18, the SOX turned its 3 Week Chart down by tracing out 3 consecutive lower weekly lows into the week of 4/2.

Following that low, the SOX rallied and put in 2 consecutive higher weekly highs.

This satisfied my WEEKLY Minus One/Plus Two sell pattern which is a swing method I created to determine the trend.

The 3 Week Chart pointing down satisfies the Minus One part of the equation while 2 consecutive higher weekly highs put the SOX in the sell position.

The strategy did a good job of sounding the alarm before the semiconductor carnage on Thursday.

Now the SOX is flirting with a one-year rising trendline that also becomes a Neckline of what looks like a possible Head & Shoulders Top formation.

A break of the Neckline projects to 1085-1090, which ties to prior resistance and the breakout point before the leg up from early September. This supports the idea of a break toward 1085.

The significance of this Neckline is underscored by the fact that a failure to hold will also trigger a weekly Rule of 4 sell signal -- a break of a weekly 3 point trendline.

Given that the SOX has not yet satisfied a test of its 200 dma (which ties to the 50 week moving average in the above chart), the likelihood is it will do so.

Plus, the 3/12 weekly Topping Tail on the SOX is synchronous with the important 18-year cycle from 3/13/2000. Back then, there was a weekly reversal from an all time high in the SOX... a week before the SPX Dot.Com Bubble Top.

The SOX Sirens were luring the ships onto the rocks of what was to become a 3 year bear market.

History may be repeating.

Conclusion.

At the same time as chips snapped on Thursday, 10 year yields broke out of a Bull Flag on the table since mid-February.

This looks like the beginning of a 3rd wave up with the first leg up starting in December and the 2nd leg consolidation playing out from February 21 to April 2.

As you know. we have been saying that equities, gold and oil were at meaningful inflection points this week and into late April.

My research also indicates that the 2.8% 10-year yield is key.

It eclipsed 2.8% on Thursday, closing at 2.91%.

This is a meaningful indication that Thursday was a  genuine Breakaway Gap to the topside in TNX. A push over the widely-watched 3% level is on the table.

(click here to enlarge)

I don't think the stock market will go unscathed from a breakdown in chips and a breakout in 10 year yields.

The presumption is a 3rd wave up in yields ties to a 3rd wave down in the SPX.

Strategy.

Yesterday morning, we said the SPX should be magnetized to 2680ish. It bounced from 2681.

This is the area of an open gap and the 50 dma.

The normal expectation is that the first pullback to the 50 day would find support.

Violating the 50 day line now after pushing above it implies another false breakout above the 50 day. That happened in late February and mid-March... both of which perpetuated down legs.

If the 50 day line is lost with conviction (range and volume) in league with a break below the top of a 2 to 3 week base and 2660-2670, it will install another lower high. That means a possible break to new lows.

On Monday, we will go detail the price levels of the 'Uncle Point' and the 'Get Out Of Dodge Pivot' on the SPX, their historical context, and what to expect should they be violated.

Bullish corrections usually don't run past 12 to 13 weeks. So the end of April is key.

Want to keep following this story Monday? Sign up below: