In a May 26 note on the semiconductor index (SOX), an Elliott Wave Principle (EWP) framework used Fibonacci relationships between the 1st, 3rd and 5th waves to target the smaller 5th Wave (W-5) at $13,400-14,000, while pointing to a possible red W-iv retrace towards about $9,600 once that zone was met. The index then topped at $13,998 on June 3 and, over the next four days, fell 15.9% to around $11,900. The move leaves the red 3rd wave (W-iii) consistent with the projected range and shifts focus to the unfolding red 4th Wave (W-iv), described as breaking into three smaller green waves.
On the wider count, the blue 161.8% extension cited previously was reached, with red W-iii exceeding the 161.80% level at $13,336 by 662p. A common W-iv objective is the blue 100.0%, which at $9,523 implies a potential stall around $10,185 after adding 662p, aligning with a $10,390-11,490 target zone. The next leg, red W-v, is framed with an ideal endpoint near $15,000 +/- $1,000.
Wave Analysis and Near-Term Outlook
We see the recent 15.9% drop in the semiconductor index from its June 3rd peak as a predictable correction, not the end of the bull market. This move fits our Elliott Wave model, which identified the $14,000 level as a major turning point for a temporary pullback. Recent data shows a spike in the CBOE NDX Volatility Index (VXN) to over 22, its highest in three months, confirming trader nervousness and supporting our view of a corrective phase.
Given this, we believe traders should position for further downside into late June and July, as the index targets the $10,185 to $11,490 zone. This suggests that buying July or August put options on semiconductor ETFs could be a viable strategy to capitalize on this decline. Historically, similar rapid pullbacks in the SOX during a bull market, like the one in late 2021, often reached a 20% correction before finding a floor.
Strategy and Risk Management for a Bullish Continuation
As the index approaches our support target, we will monitor for signs of a bottom to pivot our strategy. Once support is confirmed, the focus will shift to the anticipated fifth wave, which projects a powerful rally toward the $15,000 level later in the year. This long-term bullish outlook is reinforced by recent Semiconductor Industry Association (SIA) data released last week, which projects a 13.1% growth in global sales for 2026, driven by strong demand in the AI and automotive sectors.
We must acknowledge that these corrective waves can become more complex, so risk management is key. Using defined-risk strategies, such as put debit spreads instead of buying naked puts, can limit potential losses if the timing is off. This allows for participation in the expected downward move while capping exposure.
