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SOXL shows remarkable volatility and upward momentum, but caution urged due to overbought conditions

StockInvest.us, 1 month ago

StockInvest.us Technical Analysis

The Direxion Daily Semiconductor Bull 3X Shares (SOXL) has exhibited remarkable volatility and significant upward momentum in the most recent trading sessions. It closed at $37.48 on January 24, 2024, representing a 4.34% increase from the previous close and matching its yearly high of $38.92. This momentum is underscored by a substantial Relative Strength Index (RSI) of 87, indicating that the stock is currently in the overbought territory.

The stock's price is well above both the 50-day and the 200-day moving averages (MAs), suggesting a strong bullish trend is in place. The 50-day MA stands at $26.63, while the 200-day MA trails at $21.84. Historically, such a gap between the stock's price and its moving averages may indicate that a correction could be forthcoming, or at the very least, that the growth rate may slow down.

Despite the negative Moving Average Convergence Divergence (MACD) of -0.11 indicating potential weakness, the high trading volume signifies strong investor interest. The previous trading volume of approximately 96.05 million surpasses the average volume of around 67.69 million, demonstrating increased trading activity which could be attributed to the positive sentiment surrounding leveraged ETFs in the semiconductor sector.

The Average True Range (ATR), a measure of volatility, stands at approximately $5.57, which points to the substantial price swings that are characteristic of leveraged ETFs like SOXL. Consequently, we may expect continued volatility in the upcoming trading session and week.

The ETF has exceeded support levels at $34.86, and with no immediate resistance level identified, there is potentially more room for upside movement. However, the high RSI may suggest some caution as it can also be a precursor for a potential price pullback as traders may start to consolidate gains.

SOXL Fundamental Analysis

SOXL’s market capitalization places it at $8.65 billion, and with a P/E ratio of 40.43, this indicates that the market has robust expectations of future earnings. However, leveraged ETFs like SOXL are typically used for short-term trades rather than long-term investments, due to their high volatility and the decay factor associated with daily leveraged products.

The reported earnings per share (EPS) of $0.93 provides a glimpse into the company's profitability on a per-share basis, which appeals to potential investors. Given the nature of ETFs, the performance is also reflective of the underlying semiconductor sector which has seemingly witnessed a period of strong growth, noted in the referenced news about the positive performance of leverage/inverse ETFs in the last week.

Stock Performance Prediction

Considering the extended overbought condition indicated by the high RSI reading, SOXL may experience a pullback or consolidation in the following trading day and perhaps in the upcoming week. Nevertheless, the overarching bullish sentiment in the semiconductor sector may keep providing lift to the stock.

The positive news surrounding leveraged/inverse ETFs, coupled with the broader market gains, suggests there might still be investor appetite for this kind of speculative investment, potentially signaling continued upside in the near term. While the stock has seen significant appreciation and may yet benefit from continued bullish sentiment in the semiconductor industry, the extremely high RSI suggests the stock is overbought, which could lead to a price pullback as traders may begin to lock in their profits.

Short-term traders who thrive on volatility might retain their positions or look for entry points after a pullback, while long-term investors should proceed with caution, as the leveraged nature of SOXL makes it less suitable for long-term holding due to the higher risks of volatility and decay. The stock is unlikely advisable for new positions until a clearer direction is indicated by the technical indicators and market sentiment. Investors already holding positions may consider implementing trailing stop-loss strategies to preserve capital while still taking advantage of potential continued gains.

Check full SOXL forecast and analysis here.