The VanEck Semiconductor ETF (SMH), which counts Nvidia (NVDA), Taiwan Semiconductor (TSM), and Broadcom (AVGO) as its top three holdings, has formed a bearish head-and-shoulders stock pattern, according to Yahoo Finance AlphaSpace chart analysis.

The left shoulder of the pattern emerged in mid-May, followed by the formation of the head in late June. The right shoulder has now emerged, completing the bearish pattern. The pattern will be official if the ETF falls below its May 19 closing low of $543.

The Bearish Implications of a Head-and-Shoulders Pattern

A head-and-shoulders pattern is widely considered bearish, suggesting that buyers are gradually losing control of the market for a particular stock or ETF. During the formation of the left shoulder and head, buyers can still push prices to new highs. However, the inability to push higher on the right shoulder suggests that buyer demand is beginning to weaken.

Once sellers push the stock below the neckline, many traders interpret this move as evidence that the prior uptrend has ended and that a new downtrend may be emerging.

Investors are currently worried about the potential cooling of the AI spending boom, which has driven extraordinary growth and soaring valuations in the sector. The sector is also facing concerns about potential export restrictions, tariffs, and geopolitical tensions that could disrupt chip sales to key international markets.

At the same time, investors are questioning whether demand for AI chips can continue growing fast enough to justify the massive capital spending plans and lofty expectations baked into many semiconductor stock prices.

AMD chair and CEO Lisa Su has pushed back on the bearish narrative, stating that the returns on investment are high and demand for compute is at a premium today. However, Evercore ISI strategist Julian Emanuel notes that ongoing worries about AI overspending, demand durability, and return on investment have resulted in profit-taking churn being made more violent, given the outsized gains already enjoyed by AI winners since the March lows.

Given the bearish head-and-shoulders pattern and the underlying concerns about the sector, it is possible that another drop in semiconductor stocks is on the horizon. The bulls may need to wait for more positive catalysts post-summer to regain control of the market.