Tuesday’s session served as a stark reminder of how volatile the Semiconductor sector (SMH) can be. Nvidia (NVDA), which hit all-time highs on the open after gapping up to $153, delivered a nasty fake out that caught plenty of traders off guard.
The stock reversed sharply, dragging down other chip names and leading broader market declines.
Semiconductors have been the engine behind much of the market’s gains in the past two years, so when Nvidia — the poster child of the sector — stumbles, the ripple effects are hard to ignore.
Other names like Broadcom (AVGO) and Micron (MU) also saw declines, raising the question: Is this just a short-term rotation or the start of something more significant?
Recognizing the Fake Out
The setup on Nvidia looked promising at first…
A gap to fresh highs had many traders piling in, only for the stock to reverse course and sell off hard. These fakeouts can be brutal, but they also provide valuable lessons.
First, never chase a stock at extreme highs without confirming follow-through. The broader sell-off in semiconductors hinted that Nvidia’s move might lack conviction — and that proved to be the case.
For traders, the key takeaway is to wait for confirmation before entering a position. Whether you’re trading options, shares or spreads, always have a clear plan for managing risk, especially in volatile sectors like Technology.
One interesting point from Tuesday’s session was the divergence within the sector.
While Nvidia and Broadcom were under pressure, Micron saw some buying interest, climbing more than 3%. This could be a case of short-term rotation — money temporarily flowing out of Nvidia and into perceived value plays like Micron.
Or, it could signal the beginning of broader sector weakness.
It’s worth noting that semiconductors are highly sensitive to macroeconomic factors, such as interest rates and global demand. With the Technology sector (XLK) already showing signs of slowing momentum, traders should watch for additional red flags, such as continued underperformance or deteriorating earnings forecasts.
Trading Semiconductors: Stay Nimble
For those looking to trade chip stocks, the best approach may be to stay nimble. Options strategies, like ratio spreads or hedged income plays, can help reduce risk in this kind of choppy environment.
It’s also wise to focus on stocks with strong support levels that offer favorable risk-to-reward setups.
In volatile markets, patience and discipline are your greatest allies. Nvidia’s fakeout may have rattled some traders, but it also provided a textbook example of why chasing highs without a plan can be costly.
As always, let the market do its thing, and don’t force trades where the risk outweighs the potential reward.
Semiconductors may remain the market’s leading sector, but as Tuesday’s session proved, they can also lead the way down.
I’ll see you in the markets.
Chris Pulver
Chris Pulver Trading
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*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
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