SMH Hits The Wall: Why Semiconductor Bulls May Face a Rude Awakening
The VanEck Semiconductor ETF (SMH) has painted a textbook bearish setup that's caught my attention, and frankly, it couldn't come at a worse time for the sector. After months of grinding higher, SMH has bumped its head against not one, but two significant resistance levels simultaneously—and that's never a good sign for continuation.
The Technical Picture Says It All
Looking at the daily chart, SMH has rallied straight into what I call a "confluence of pain." The price action has reached two major resistance barriers that are now working in tandem to cap any further upside. First, we have the gap fill resistance sitting right around the $265-270 area—a level that represents unfinished business from previous price action. Second, and perhaps more damaging, is the former ascending trendline that once provided reliable support throughout the long-term uptrend.
This trendline deserves special attention because it tells the story of a fundamental shift in market structure. Notice how price respected this ascending line on multiple occasions during the rally, finding support each time it tested lower. Those green arrows on the chart mark the exact spots where bulls stepped in to defend the trend. But something changed recently. Price broke below this critical support level and is now attempting to rally back up to it.
The problem? Former support becomes resistance. This is one of the most reliable concepts in technical analysis, and it's playing out in real-time with SMH. The red arrow near current price levels shows how the rally has stalled right at this intersection of the gap fill and the former trendline. That's no coincidence—it's institutional selling.
Fundamental Headwinds Building
The technical setup becomes even more compelling when you factor in the fundamental landscape facing semiconductors. The sector is dealing with multiple challenges that wasn't as pronounced during the earlier rally phases.
Sales pressure has made several suppliers sell their products at lower unit prices, as many procurement teams are using excess inventory to fill any backlogs that arise, according to recent industry analysis. This pricing pressure is directly impacting margins across the sector, creating a headwind that wasn't present during the euphoric AI-driven rally of 2023 and early 2024.
The U.S. economic backdrop is also shifting in ways that don't favor semiconductor demand. In February 2025, president Trump suggested plans to impose tariffs on semiconductors at 25 percent or higher, with possible increases over the course of the year. These potential tariffs could significantly impact the cost structure for companies that rely on imported chips, ultimately reducing demand for semiconductor products.
Perhaps most concerning is the rising competition from Chinese companies, particularly Huawei. Huawei is quietly expanding its presence across the supply chain, including in lithography, a key chokepoint for China's semiconductor progress. While Huawei Technologies is expected to ship no more than 200,000 of its advanced artificial intelligence (AI) semiconductors this year, the company's broader strategy of building out China's entire semiconductor ecosystem poses a longer-term competitive threat to U.S. companies.
The automotive semiconductor market, a key growth driver in recent years, is also showing weakness. Companies which are dependent on the automotive industry expect a weak 4Q 2024. Infineon Technologies, Texas Instruments, NXP Semiconductors, and Renesas Electronics all guided for revenue declines in 4Q 2024 based on a weak automotive market and inventory reductions.
Consumer Demand Remains Sluggish
Don't expect the consumer to ride to the rescue either. Demand from PC and mobile markets may remain muted even as AI-related demand continues to support certain segments. The reality is that AI chip demand, while significant, represents a relatively small portion of overall semiconductor consumption. The bread-and-butter markets of PCs, smartphones, and consumer electronics remain challenging.
Seasonal demand has been lower than expected, as seen with China's National Day Golden Week, suggesting that even traditional demand patterns are breaking down.
The Trading Setup
From a risk-reward perspective, this setup offers an attractive short opportunity. The confluence of the gap fill resistance and the former trendline creates a natural spot for stops above the $270 level. Any break above this resistance would negate the bearish thesis and suggest the bulls have regained control.
However, if SMH fails to break through these dual resistance levels, the downside target becomes the next major support zone, which sits considerably lower. The psychology here is important—when former support becomes resistance and holds, it often triggers a wave of selling from both momentum traders and institutional investors who recognize the change in market structure.
Looking at the volume characteristics during this recent rally attempt, there's been a noticeable lack of conviction from buyers. This tepid demand at resistance levels often precede significant moves lower.
The semiconductor sector's technical breakdown, combined with margin pressures, geopolitical tensions, and consumer demand weakness, creates a compelling bearish case for SMH. Sometimes the best trades are the ones where technicals and fundamentals align perfectly—and that's exactly what we have here.
