These two high-profile chip stocks look overextended, says Katie Stockton

According to Fairlead Strategies, semiconductor stocks, which have significantly outperformed the S&P 500 since April, are showing signs of exhaustion, potentially signaling a loss of market leadership. Broadcom's (AVGO) recent earnings-driven sell-off and Nvidia's (NVDA) underwhelming earnings reaction, coupled with DeMARK Indicators, suggest near-term retracements of approximately 17% to their respective 50-day moving averages; longer-term momentum has waned, potentially leading to trading ranges or bearish patterns for both stocks.

Analysis

The semiconductor sector, a significant source of market upside since the April low with the Philadelphia Semiconductor Index (SOX) outperforming the S&P 500 Index (SPX) by over 20%, is now exhibiting signs of overextension, potentially signaling a loss of primary market leadership. Broadcom (AVGO) experienced a negative market reaction to its recent earnings, gapping lower and confirming a short-term counter-trend 'sell' signal from DeMARK Indicators, alongside downturns in its daily stochastic oscillator and MACD. This technical setup suggests a potential deeper pullback for AVGO over the next 2-4 weeks, with initial support from its 50-day moving average near $204, approximately 17% below current levels. The sell-off resulted in an unconfirmed breakout, leaving resistance from the December high near $252 intact. Intermediate-term overbought conditions persist, and a pullback could generate a 'sell' signal in the weekly stochastic oscillator. While AVGO maintains a long-term cyclical uptrend above weekly cloud model support near $197, waning long-term momentum suggests a transition into a trading range. Similarly, industry bellwether Nvidia (NVDA) displays signs of upside exhaustion according to DeMARK Indicators, supporting a near-term retracement after an underwhelming earnings reaction. NVDA's 50-day moving average is also about 17% below its current price. Long-term momentum for NVDA has weakened, and a significant pullback could manifest as a bearish head-and-shoulders pattern.

Key Decisions for Investors

• Given the overextended technicals and negative reactions to earnings for key semiconductor stocks like AVGO and NVDA, investors should consider moderating exposure or implementing hedging strategies due to the heightened risk of a sector-wide pullback.
• Closely monitor the 50-day moving averages for both AVGO (near $204) and NVDA (approximately 17% below current levels) as these are critical near-term support levels; a breach could indicate further downside.
• For AVGO, anticipate a potential shift into a trading range, with resistance near $252 and long-term support around $197, suggesting that range-bound strategies may be more appropriate than aggressive bullish positioning in the intermediate term.
• For NVDA, be vigilant for the development of a bearish head-and-shoulders pattern, as its confirmation following a pullback would imply a more significant negative outlook and may warrant a defensive or bearish stance.
• Recognize that weakness in the semiconductor sector, which has been a market leader, could negatively impact broader market sentiment and performance, warranting a more cautious overall market outlook.