The Nvidia-led tech rally has been on a bullish run for months, but signs are starting to show that it may be losing steam. A bearish engulfing candle appeared on March 8th, signaling a potential shift in direction in the chip sector, as seen in the iShares Semiconductor ETF (SOXX) chart. This trend is reflected in key chip stocks such as Nvidia, AMD, and Broadcom, all showing signs of a pullback. Micron (MU) stands out as a prime example of a stock on the verge of a trend reversal.
Examining the 6-month daily chart of MU, several indicators point towards an impending downtrend. The Relative Strength Index (RSI) is a key tool used to assess strength and weakness in a stock. When the RSI goes above 70, the stock is considered overbought. In the case of MU, the RSI is currently indicating a potential shift in momentum as it dips below 70. Additionally, the price action in the chart shows a clear downtrend with lower highs and lower lows, confirming the bearish outlook.
The trade structure being suggested is a “bear put spread”, also known as a “put debit spread”. The specific trade setup proposed is to Buy the Micron $121 put with a May 3rd expiry and Sell the Micron $120 put with a May 3rd expiry. The total cost of this trade is $50 with a potential profit of $50. The rationale behind choosing a short expiry date of May 3rd is based on the idea that bear put spreads tend to yield quick results and work best between 14-21 days. If MU trades at or below the short strike by the expiration date, this trade could yield a 100% ROI on the amount risked.
It’s important to note that the upcoming earnings season introduces a level of uncertainty that could impact the trade. Positive tech earnings during the trade window pose a risk to the bearish position on MU. It’s crucial for traders to stay informed and be prepared for potential market reactions based on earnings announcements.
While the Nvidia-led tech rally may have been strong for months, there are signs pointing towards a potential reversal in the chip sector. Traders should carefully analyze technical indicators and consider implementing strategies like bear put spreads to hedge against a possible downturn. Staying informed and prepared for market fluctuations is key in navigating the ever-changing landscape of the stock market.