Direxion Daily Semiconductor Bull 3X Shares (NYSE: SOXL) was trading down Tuesday for its fourth bearish day in a row, which has seen the ETF decline a total of about 33% since the market closed on Oct. 5.
The semiconductor sector has suffered a steep downturn this year, which has caused SOXL to plummet almost 90% from the Jan. 4 high of $74.21.
SOXL’s sharp decline — paired with signals that a bounce for the ETF may be imminent — could provide a solid trade for traders with a high risk-reward appetite.
SOXL is a triple leveraged fund that offers 3x daily leverage to bullish movements across a variety of stocks in the semiconductor sector.
The ETF tracks a number of semiconductor companies through its holdings, with popular companies such as Advanced Micro Devices, Inc (NASDAQ: NASDAQ:AMD) making up 3.97% of the fund and NVIDIA Corporation (NASDAQ: NASDAQ:NVDA) weighted at 5.53%.
The U.S. government's recent decision to place restrictions on exports of some high-end chips to China has weighed heavily on domestic chip makers, causing a number of analysts to lower their price targets on companies like AMD and Nvidia as earnings season approaches.
On Monday, Northland Capital Markets analyst Gus Richard maintained an Outperform rating on AMD and lowered the price target from $105 to $80. Similarly, Citigroup (NYSE:C) analyst Atif Malik maintained a Buy rating on Nvidia and lowered the price target from $248 to $210.
Within every bearish cycle, short-term bullish bounces take place. With how beaten down the semiconductor sector is, a spike to the upside is likely on the horizon.
It should be noted that leveraged ETFs are meant to be used as a trading vehicle as opposed to a long-term investment by experienced traders. Leveraged ETFs should never be used by an investor with a buy and hold strategy or those who have low risk appetites.
Traders who are bearish on the semiconductor sector can track the Direxion Daily Semiconductor Bear 3X Shares (NYSE: SOXS).
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The SOXL Chart: SOXL was working to print a doji candlestick on Tuesday, which could indicate a bounce will come on Wednesday.
It should be noted that candlesticks are lagging indicators, meaning Tuesday’s candlestick will need to print for confirmation.
SOXL has been trading in a downtrend since Aug. 4, with the most recent lower high formed on Oct. 6 at $11.92 and the most recent confirmed lower low printed at the $8.74 mark on Sept. 30. Because SOXL hasn’t bounced up to print a lower high in four trading days, at least a bump up to form its next lower high over the next few days is likely.
A bounce is also likely because SOXL’s relative strength index (RSI) is measuring in at about 32%. When a stock or ETF’s RSI nears or falls to the 30% level, it becomes oversold, which can be a buy signal for technical traders.
When SOXL’s RSI fell to the 30% mark on Sept. 30, the ETF shot up about 36% over the four trading days that followed before entering back into the downtrend.
There is resistance above at $8.19 and $9.52 and support below at $7.13 and $5.96.
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