Why I'm short SMH despite NVDA ripping
NVDA ripped 4% yesterday. SMH didn't move.
When the leader carries the tape and the breadth doesn't follow, you pay attention.
I added a put condor on SMH last week. Here's why.
One: RSI is at 85 with bearish divergence on the composite indicator, my preferred momentum gauge. Overbought is one thing. Overbought with momentum rolling over underneath is another.
Two: the move is parabolic. The chart angle is steeper than anything that's held for the last six months. Parabolic moves don't end sideways, they end with a snap.
Three: catalyst. INTC and TSM earnings printed well, and AMD is up next week. If AMD disappoints already-high expectations, the pullback is the path of least resistance.
There's also the helium shortage. SoH inventories have masked the problem so far, but that can't last forever. The longer this drags, the higher the sudden-stop risk.
Now the structure question. Vol in SMH is high, so selling calls would pay. But selling calls into a parabolic up-move is not how I want to be short. Too risky.
A put condor solves it. Downside exposure to the pullback. Time for it to play out. Low theta while I wait.
If you can't pick a structure that survives being early, you can't be a contrarian.
Imran
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