AI chip demand is exploding — ride the momentum on ASML and TSMC

Verdict: strong thesis, conflicted entry — wait for a clean trigger

The verdict on this ASML/TSM pullback setup is: wait, not buy. The fundamentals are genuinely strong — ASML's fiscal 2025 revenue rose 15.6% to $32.7B with free cash flow up 21.8% to $11.1B, and TSM's fiscal 2024 revenue grew 33.9% — but the ASML leg closed at $1,729.52, simultaneously meeting the entry condition (at or below the 50-day average of $1,729.82) and the exit condition (below the 21-day average of $1,733.34), so a position entered today is immediately one weak close from the signal stop. The TSM leg is cleaner: it needs a pullback of about 3.8% to $419.03 before arming, which matches the setup's history of earning from buying weakness. The strongest point for the trade is the reported backtest: +54.5% over 60 months, +29.8% over 24 months, and +17.7% with only a 2.9% drawdown in the most recent 12-month window. The strongest point against is the coin-flip 49.7% win rate across 286 trades and a 27.0% historical drawdown, compounded by a parameter-sensitivity evaluation that found no robust nearby setup — the published rules stand on their history alone. What would flip the verdict: ASML reclaiming the $1,733.34 21-day average, or TSM closing at or below $419.03, either of which puts a leg in a coherent entry state with its exit condition not already triggered.

Trade now: ASML is at the entry line — TSM still needs a pullback

The ASML leg is essentially at the trigger today. The stock closed at $1,729.52, a touch under the $1,729.82 level of its 50-day moving average — that entry condition is met. The relative strength filter is also satisfied (RSI at 50.2 versus a floor of 20), price is holding above the nearest support at $1,717.31, and the trend filter is active. In other words, every entry condition on the ASML leg is live right now. One caveat before you click buy: the exit signal is also technically live. ASML closed $3.82 below its 21-day average at $1,733.34, which is the rule set's signal exit. A position entered here would carry a stop 2.4% below entry (roughly $1,687.72 at the current close) and a take-profit at 4.8% (roughly $1,813.08), for an effective reward-to-risk of 2:1. The trailing structural stop sits at $1,701.70, the second support level — the tighter 2.4% stop fires first. The TSM leg is not ready. Its close of $435.56 sits $16.53 above the required at-or-below level of $419.03, so waiting means letting TSM pull back about 3.8% before that leg activates. The 12-month backtest window on this setup returned 17.7% with a 57.7% win rate across 26 trades, and the 24-month window returned 29.8% with a 9.0% maximum drawdown — consistent with a pullback-entry profile that earns its keep by buying weakness, not chasing strength. Concrete plan: if you want the ASML leg, size to the fixed-risk method (2.4% of the account at risk per position, maximum 25% of capital per name) and respect the exits mechanically. If you want both legs, place alerts at $419.03 on TSM and let the market come to you.

Why the bull case still has support

The fundamental backdrop genuinely supports the AI-hardware thesis. ASML's fiscal 2025 (period ending December 31, 2025) shows revenue up 15.6% to $32.7B, net income up 26.9% to $9.6B, operating margin expanding to 34.6% from 31.9%, and free cash flow up 21.8% to $11.1B. That is not guidance-dependent hope — it is already reported in SEC XBRL data. On the buyer side, TSM's fiscal 2024 shows revenue up 33.9% to $2.89T with net income up 36.0%, confirming the idea's premise that ASML's largest customer is converting AI demand into real profit, per the Reuters piece on TSMC's record quarter. The quality metrics argue these are structural winners, not just cyclical beneficiaries. ASML's 34.6% operating margin sits in the 95th percentile of 690 industrial-sector peers and its $11.1B free cash flow in the 99.9th percentile; TSM's 45.7% operating margin is in the 98.4th percentile of 854 tech peers. ASML's balance sheet is also de-risking: debt-to-equity fell 30.6% year over year to 0.14, the lowest in the disclosed series back to 2008, while ROE recovered to 49.0% and shares outstanding shrank 2.0%. The news flow is one-directional. Per Yahoo Finance, ASML raised its 2026 guidance for a second time and beat Q2 earnings, with Barron's noting the stock gained on AI-spending tailwinds, and a separate Yahoo Finance piece projects AI chip spending reaching $1.6 trillion by 2030. TSM's dividend record — 31.9% annual growth, trailing 12-month payout of $3.57 per share — and ASML's 26.8% dividend growth both indicate management confidence in cash generation. The backtest evidence is a completed, traded test on daily bars: over the 60-month window the strategy returned 54.5% across 286 trades, and it has been profitable in each of the…

Scores

• Conviction score breakdown: 64
• Thesis support: 75
• Trade readiness: 45
• Risk quality: 50
• Backtest evidence: 70
• Fundamentals trend: 80

Watch items

• ASML — Price vs 50-day EMA (entry)
• ASML — RSI (14)
• ASML — Price vs 21-day EMA (signal exit)
• ASML — Price vs second support (trailing stop)
• TSM — Price vs 50-day EMA (entry)
• TSM — Price vs 21-day EMA (signal exit)
• TSM — Insider open-market net buying (next ownership filing)
• ASML — Next dividend ex-date