Taiwan Semiconductor Manufacturing (TSM), a major chip supplier for Apple and NVIDIA, recently saw its stock price soar. After reaching $302, it now sits 42% above its 200-day moving average. This suggests it may be overextended. Since April, TSM’s stock has climbed from $130, representing a 130% increase, largely due to rising demand for AI chips. The stock has followed an upward trendline that has consistently supported it during market dips. This trendline is now important for market watchers. Recently, TSM’s stock dropped from a high of $310 to $280, before bouncing back to $302. This may indicate a potential overextension. Stocks that are 42% above their 200-day average often signal a possible pullback. A typical retracement of 14-16% could bring TSM down to its trendline, around $250-$260, which would be a healthy market correction. Such a pullback might provide a good opportunity for traders to take advantage of market shifts. If the stock successfully retraces, it could retest the $310 highs. However, if it falls below the trendline, it could mean a change in market trends. Currently, TSM is doing well but faces potential overextension. A 14-16% pullback could offer valuable trading chances and insights into the stock’s future. With TSM now back at $302 after a significant reversal, it appears to be very overextended. Being 42% above its 200-day moving average is uncommon and suggests short-term fatigue. The recent sharp price changes between $280 and $310 show a conflict between buyers and sellers. This volatility is heightened by TSM’s upcoming Q3 earnings report, set for October 21, 2025. Implied volatility for November options is currently above 65%, indicating the market expects a major shift post-results. While buying options is becoming costly, it also opens up opportunities for those selling premium. For traders expecting a healthy pullback, selling cash-secured puts with a strike price around $260 might be a smart strategy. This approach allows you to collect a high premium while setting your entry point at the trendline support. If the stock drops to that price and you get assigned, you’ll obtain shares at a desirable level. Reflecting on the significant rally in 2021, TSM also became overextended before experiencing a 20% correction over two months. History shows that pullbacks like this are common, even in strong uptrends. A retracement to the $250-$260 range fits this historical trend perfectly. On the flip side, if the key trendline breaks after the earnings, the bullish outlook could suffer. A close below $250 on heavy volume would signal that traders might want to buy long-dated puts, anticipating a move towards the 200-day moving average, currently around $212. The recent September 2025 CPI data being slightly high adds another concern, potentially dampening enthusiasm for tech stocks with high growth. For now, it’s best to wait and see how earnings volatility unfolds. Keep an eye on whether the upward trendline holds, as it has for the past six months.

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