An extended challenging period is likely for semiconductors

I was lucky with my Micron (MU) trade since I have been wrong about its short term direction. When MU was chased up to its all time high around $60, I knew it was too hyped and vulnerable to a sharp correction. I made this call right as it indeed crashed towards $50 as I expected following its earnings report. But I thought it might have done this correction at $50 and should resume its next leg up from there. I indeed added my long position a few weeks ago by selling puts. Luckily I was right for a very short term when MU bounced back for a while that allowed my puts expired worthless. Then to my surprise, MU got crashed again and is now trading around $45. Now the big question is whether MU is a good buy now. While I’m still bullish for it for long term, I’m afraid MU will likely still struggle after such a bearish price action lately. Actually looking at the whole semiconductor sector now, the picture is not pretty at all. Below is the weekly chart for semiconductor (SMH). It has broken down from the bearish H&S pattern as I’m writing. The neckline is around $100. Technically it often declines the same amount from the neckline to its peak, roughly a $15 distance in this H&S. In other words, it won’t be out of norm to see SMH to drop towards $85ish before this correction is complete for the whole semiconductor sector. This may likely take several weeks at least with a lot of volatility in between. When the whole sector is doing poorly, I doubt any individual stocks will fare well without some exceptionally good news. For MU, it will at least struggle along with the whole sector for a while and there is a good chance it may even drop towards low $40s before the whole correction is done. People often got confused about the price actions in response to earnings. I know some friends were chasing highs for MU before the earnings and got excited about it even after its initial fall following the earnings because they thought MU’s earnings was fantastic and superb and it would go high soon. No doubt it was a good earnings report.  But general investors often fail to understand that the market is an efficient forward looking animal. When a high expectation is priced into a stock, it can crash regardless how great its earnings is if it cannot meet the high priced-in expectations. That’s what we are seeing for MU. Apparently even $50 is too high for the market now. That’s why chasing highs is never a good idea and often dangerous. If you are itchy to buy MU, better to wait till the dust settles. So far, MU is a falling knife that can hurt you badly if you are too early!