Semiconductor Weakness Is Testing the Market’s AI Leadership

The headline from Taiwan Semiconductor was not weak. TSMC reported record quarterly results, beat revenue and earnings expectations, and posted a gross margin near 67.7%. The stock still sold off, and that reaction became the most important signal into the close. Investors were not responding to a collapse in AI demand. They were questioning whether strong growth, record profitability, and rising capital spending were already reflected in semiconductor valuations.

That shift in expectations spread quickly through semiconductors, memory stocks, and data center infrastructure names. The broader market held up better, but the divergence between SPY and QQQ showed where the pressure was concentrated. For traders, the question is no longer whether the AI buildout remains real. It is whether semiconductor leadership can continue supporting the broader market when strong results are no longer enough to attract buyers.

TSMC’s Results Were Strong, but the Reaction Was the Story

TSMC delivered approximately $40.2 billion in quarterly revenue and record profit, while also raising its capital expenditure outlook as it expands production capacity. The fundamental picture remains strong. AI and high-performance computing demand continue to drive the business, and management’s forward outlook did not signal a sudden deterioration in demand.

The market’s response points to a different concern. Expectations surrounding AI infrastructure have become so elevated that even exceptional results may not be enough to extend valuations without interruption. Higher capital spending, the cost of expanding overseas production, and questions about how long record margins can persist are beginning to enter the discussion.

That is a more important takeaway than whether TSMC beat a single quarterly estimate. When a market leader sells off after producing record numbers, traders need to watch whether the weakness remains isolated or begins spreading through the rest of the sector.

On the chart, TSMC is running into resistance near $434.80, the midpoint of its parallel channel. If selling pressure continues, the first meaningful support area sits around the gap between $390 and $393. The lower boundary of the channel is deeper at $374.72.

Those levels matter, but TSMC is not the clearest warning signal. That distinction belongs to the semiconductor ETF.

SMH Is the Level That Matters Most

The VanEck Semiconductor ETF has been developing a large head and shoulders pattern, and price is now testing the neckline near $564.45.

A confirmed daily close beneath that level would change the sector’s technical structure. The neckline would begin acting as resistance, and the pattern’s measured move projects toward $460.25. That would represent a significant additional decline and would likely create pressure beyond semiconductor stocks themselves.

SMH matters because semiconductors have been one of the market’s primary leadership groups. When leadership weakens, the effect can spread through the Nasdaq, other high-multiple technology names, and eventually the broader indexes.

A single intraday break would not be enough to confirm the larger bearish pattern. The close matters. If SMH recovers and holds above $564.45, the sector could stabilize. If it begins closing beneath the neckline, traders should treat the weakness as a structural development rather than an ordinary pullback.

That is the central decision point coming out of today’s session.

QQQ Is Showing More Damage Than SPY

The index action reinforced the semiconductor message.

SPY declined modestly and tested its declining trendline near $747.88. The ETF recently confirmed a near-term breakout, but the follow-through has been weak. Price has returned to the same trendline repeatedly, suggesting buyers have not generated enough momentum to separate from the breakout area.

The immediate level is approximately $747.49. A close beneath that area would put the next rising trendline near $744.97 in focus. Large lower wicks show that buyers are still defending the zone, but repeated tests reduce the margin for error.

QQQ took the heavier hit because of its concentration in technology and semiconductor-related names. Support near $705.39 held into the close, but it has already been tested several times. Every additional test gives buyers another opportunity to defend the level, but it can also absorb more of the demand sitting there.

A loss of $705.39 would expose the next major support near $695.25.

The hierarchy is clear. SMH is the leading warning, QQQ is showing the most direct index pressure, and SPY is holding up better through rotation outside technology. SPY’s relative strength is constructive, but it does not erase the weakness underneath the surface.

Memory and Data Center Stocks Confirm the Pressure

The damage is most visible in stocks tied directly to memory, data storage, and AI infrastructure.

Western Digital has already confirmed a head and shoulders breakdown and fallen sharply from its highs. The prior neckline near $527 is now an area where a relief rally could encounter resistance. The larger measured move projects toward $212.58, although historical pivots between $315 and $300 may provide more immediate structural support before that target is reached.

Vertiv is another example of expectations resetting quickly. The stock fell more than 13% during the session and has declined substantially from its June high. Despite the selloff, momentum had not yet reached a traditionally oversold reading during Drew’s review.

The first support zone sits between $203.85 and $193.22. A bounce from that area would face resistance near $231.30, followed by Fibonacci resistance around $239.18. The important point is not to assume that a large percentage decline automatically creates a low. Price still needs to prove that buyers are willing to defend support.

Nvidia is holding up better, but its chart is also showing fatigue. NVDA tested resistance at $213.17 and formed a hanging man candle near that level. The candle reflects meaningful intraday selling pressure after an advance, but it needs confirmation before it becomes a stronger bearish signal.

Failure to reclaim $213.17 would keep a pullback toward $200 in play. Beneath that, the lower portion of the parallel channel sits near $193.41. A decisive move back above resistance would weaken the bearish interpretation and show that semiconductor leadership may be stabilizing.

Yields Remain the Macro Pressure Point

The 10-year Treasury yield continues to consolidate above its declining trendline, with 4.55% acting as the key near-term level.

A move back beneath 4.55% would reduce some of the valuation pressure on technology and other long-duration assets. Continued strength in yields, especially a push toward resistance near 4.687%, would make it more difficult for high-multiple technology stocks to regain momentum.

This is an important confirmation signal. Semiconductor weakness can remain a sector rotation if yields ease and the broader market continues holding support. If SMH breaks down while yields push higher, the pressure is more likely to spread.

Gold and silver are also reflecting a market with limited conviction around the macro outlook.

Gold is struggling near $4,098 after forming several bear flag structures. A confirmed loss of that level would put approximately $3,886 in focus. Drew also highlighted the concentration of long-term historical pivots beneath $3,500, an area that could become important if a broader liquidation develops.

Silver is holding near its own breakdown level. A daily close beneath the June 24 low at $55.62 would increase the probability of a move toward $49.85.

Neither metal has confirmed its full downside scenario, but both are close enough to major levels that traders should be watching the closes rather than reacting to intraday volatility.

Natural Gas and Energy Offer a Different Setup

Not every chart is breaking down with technology.

Natural gas traded between approximately $2.79 and $2.93 before recovering from the session low and forming a pronounced lower wick. Support remains near $2.75, while $2.90 is the immediate resistance level.

Repeated daily closes above $2.90 would improve the technical structure and create room for a test of the larger inverse head and shoulders neckline near $3.30. A confirmed breakout above that neckline would produce a measured-move projection near $4.00.

The fundamental backdrop also deserves attention. Natural gas could become increasingly relevant as data center operators search for dependable power sources capable of supporting rising electricity demand. That does not confirm the technical pattern, but it creates a potential demand catalyst behind a chart that is approaching an important trigger.

XOP is showing strength within the broader energy complex. The ETF broke above resistance, retraced to test the former resistance as support, and bounced. That structure keeps the midpoint of its channel near $172.30 in focus.

A later break above the major pivot near $191 would activate a much larger technical pattern with a projection toward $296.11. For now, XOP’s relative strength is evidence that capital is rotating rather than leaving the market uniformly.

Selective Strength Is Still Showing Up

Best Buy is breaking through a declining trendline that dates to November 2021. The stock consolidated near the line before pushing higher, giving the breakout more credibility than a single isolated move.

Resistance remains near the gap fill at $86.74, followed by the larger pivot at $93.13. The broken trendline near $77.87 becomes the primary support area if the broader market pulls the stock back.

Take-Two Interactive is more conflicted. The stock has formed an inverse head and shoulders pattern with a measured-move projection near $308.50, but it closed back beneath the neckline around $241.91.

A reclaim of that level would keep the bullish structure alive. Continued closes beneath the neckline would weaken the breakout and put support near $219.08 back in focus. With the next Grand Theft Auto release acting as a major future catalyst, TTWO is a useful reminder that a compelling narrative does not remove the need for technical confirmation.

The Bottom Line

The market did not receive bad results from TSMC. It received strong results and sold the stock anyway.

That reaction suggests the AI trade is entering a more demanding phase. Investors are beginning to separate continued business growth from the price already being paid for that growth. The first evidence of that adjustment is appearing in semiconductor leadership, memory stocks, and QQQ.

The next session comes down to three primary watchpoints. SMH needs to hold or reclaim the $564.45 neckline. QQQ needs to defend $705.39. The 10-year yield needs to remain contained near 4.55% rather than accelerating toward 4.687%.

If those levels hold, today’s weakness can remain a rotation and consolidation event. If semiconductors confirm a breakdown while QQQ loses support and yields push higher, the market may be moving into a broader structural correction.

That is what matters more than the earnings headline.