NFTRH+; an NFTRH Update and a Short Trade Setup Against a Major Semi Equipment Co.

In an NFTRH update we reviewed the newly negative Semiconductor Equipment sector book-to-bill data.  After seeing that I checked with a former associate of mine to see what is happening with the ‘boots on the ground’.  His manufacturing business is not exclusively Semi-related, but it is a heavy component.  For our purposes, it is the Semi commentary that is important…

“All is as well as can be with this severe downturn in Semi. Yes, Semi has slowed considerably, something like 25% from where we were early this year. We noticed starting in June that orders were not coming in as they were. Right now here at [company name withheld for privacy] we are off about 40% from earlier this year. What I am hearing is that this is probably not going to start improving until late first quarter. Part of it is inventory adjustments all the way up the supply chain and the rest is just business itself.”

This rhymes with what we read between the lines in recent SEMI book-to-bill commentary when, even as b2b remained strong, their spokesperson noted an expected year-end easing in equipment bookings.  Now the data are weakening, the boots on the ground are seeing a reduction in orders and per the last SEMI release “SEMI will update its 2016 equipment outlook during SEMICON Japan next month.”

A note to newer subscribers before moving on to a short trade setup on Lam Research; not that it is the be-all end-all, but we used the same sources of information as those noted above to confirm an up-turn in the Semi equipment sector in January of 2013.  We then projected that US manufacturing would recover and eventually, so too the greater economy and ‘jobs’, which are now “servicing themselves” with ‘back end’ services sectors.

In short, we are looking at the ‘front end’ while the mainstream are cheering for the ‘back end’ of the economy.

Now think about how manufacturing has been slowly but consistently easing and how the mainstream financial media are touting ‘jobs’ and the services economy.  It is just Wall Street (and associated media) being Wall Street.  It is the same Wall Street that was touting 3D Printing even as we noted it was a scam of epic proportions.  Biiwii had a post on this yesterday.

The point being that the markets often work to put a majority off sides at turning points, and that may be what is happening in the Semi’s now.  So let’s move on to Lam Research (LRCX), which acquired KLA Tencor, sending its stock price soaring.  So too has LRCX risen and presented an opportunity to try a short.

The first thing that popped out at me is how similar the current situation looks to May-June.  Short-term higher highs in each case were diverged by fading MACD, which look nearly identical.  RSI came to the over bought 70 level in both cases.  Resistance is around 80 and support 74.

lrcx daily chart

The weekly chart advises a measured target of 56 if the pattern proves bearish by losing the 74 area support.  Note that the weekly includes 2 moving averages that have supported LRCX since 2013’s launch for the sector.  So 73 to 74 is very key as support.  Technical traders might want to wait until that support is lost before speculating with a short position.

lrcx weekly chart

Fundamental traders might take a position now and use 80 to 84 as a stop loss, depending on risk tolerance and mental stamina.  Still others may wish to sensibly use the Semi sector as we did in 2013, as a macro indicator playing a roll in a bigger picture view of the markets.

Sell Short:  77 to 80 (price may or may not have 1 more short-term bounce in it)

Buy-to-Cover Target:  56 or anywhere higher that profit is deemed acceptable (it could be a long grind getting to the mid-50’s if the trade is successful)

Stop Loss:  Above 80 (strict), above 84 (more lenient)

Happy Thanksgiving to you if you are celebrating and happy regular day to you if you are not!  ;-)

A reminder that chart based NFTRH+ updates are technical trade setup ideas, which may not be revisited as the buy, sell, stop parameters are already noted. They are meant as a starting point for further research if interested. I will not personally buy every item highlighted and will sometimes sell – without prior notice (because this takes time and resource away from NFTRH’s main functions) – any item that I do buy, below target, which is something I often do as a trader. Also please be aware that I am not a fundamental stock analyst. Due diligence is your responsibility.