Here’s a powerful long-term bullish pattern in semis

Some strong selling in the broad market Monday wiped
out Friday’s gains and pushed the markets notably lower by the close
of trading. When all of the smoke cleared, the Dow
(
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shed .56% and the Nasdaq
(
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large number of sectors across the market, energy stocks seemed to ignore it and
closed much higher. At the 3 pm close on the New York Mercantile Exchange (NYMEX),
Crude Oil last traded at $66.65 a barrel (5.8% gain on the day), and natural gas
futures tacked on 11.5%, ending the day at a new record $12.42 per million
BTU’s. This strong energy action translated into further gains for drilling, oil
services and natural gas stocks. Oil Services
(
OSX |
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using
(
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yesterday as shown in the weekly chart below.

Although crude oil and crude related stocks often get all the attention when
the price of crude strengthens, other commodities that move in sync should not
go unnoticed. As crude has continued its assault on the $70 per bbl level,
natural gas futures have also moved substantially higher in the last few months
and natural gas stocks along with them. The weekly chart below shows the
(
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or Amex Natural Gas Index. Although there is not an ETF which currently tracks
the natural gas stocks, a synthetic ETF can be effected by creating a basket
consisting of
(
XTO |
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PowerRating),
(
APA |
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(
APC |
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(
BR |
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(
NBL |
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(
EP |
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just to name a few of the leaders in this sector. Morpheus has been noticing
similar strength in coal and coal producers as of late which are tracked by the
$DJUSCL, or Dow Jones U.S. Coal Index.

In direct contrast to the strength in energy commodities and related stocks
was some weakness in the Semiconductor Index, or
(
SOX |
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PowerRating). As readers of the
Wagner Daily know, the semis generally lead the Nasdaq and gains in the Nasdaq
often act as the catalyst for moves in the S&P and Dow. Its very difficult for
the Nasdaq to make a meaningful and lasting advance if the semiconductor stocks
are lagging. That being said, notice the chart below of the $SOX which clearly
shows a trendline break which occurred yesterday.

We have annotated the “cup and handle” formation on the chart which may be in
danger of failing here. The cup and handle is one of the most powerful chart
patterns on longer term (daily and weekly) charts. Although very often in this
bullish pattern the right side of the cup (early September price action) is
lower than the left side (early August price action), its generally assumed that
the trendline which forms the bottom of the cup (drawn in blue) should not be
violated. This violation, coupled with a break of the 50 period daily moving
average (red line), would lead us to believe that the semis may wish to digest
their gains from the April rally a bit longer before rallying further. Remember,
if the semis are “stuck” here the Nasdaq will not advance. If the Nasdaq cannot
advance, then it may act as a ‘drag’ on the stronger S&P. Right now all eyes are
trained on one specific pivot, that being the prior four year highs on the S&P
at 1245.86 which were breached on August 3rd of this year. When the S&P crossed
that pivot, it did so with the Nasdaq firmly on its heels but the Dow was
dragging at the time and got stuck just over the 10,700 area, about 300 points
shy of its 2005 highs. Notice that what subsequently occurred was that the major
indexes all retreated as it was difficult for the $SPX and $COMPX to continue
their advance while the Dow wallowed behind.

No analysis of broad market action is really complete until overall volume is
taken into consideration. As stated in yesterday’s publication, Friday’s huge
surge in overall volume was skewed by some abnormal events and those should be
taken into consideration when analyzing whether or not Friday (Dow up 83.19) was
really an accumulation day or if Monday (Dow down 84.31) was a distribution day.
Like with everything in the markets, one picture is often worth a thousand
words. The chart below is daily total volume in the NYSE charted on an hourly
basis.

Due to the weighting change in the S&P and the occurrence of quadruple
witching option expiry on Friday, overall volume on 9/16 was absolutely
monstrous. We have no real way of knowing how much of the turnover on this day
was real buying or more a result of the aforementioned special events. Its
definitely notable though that Monday’s overall volume came in higher than any
of the trading days last week (excepting Friday), and was higher than any
trading day since September 1st. So if we filter out Fridays volume as an
anomaly, then it becomes pretty clear that the market turned in a distribution
day yesterday.

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