The SOX hits resistance, again

The Nasdaq continued to build on last
Friday’s weakness by registering its third straight day of losses yesterday.
This time, the losses spread to the other major indices as well. Relative
weakness in the small-cap arena caused the Russell 2000 Index to lead the broad
market lower with a 0.8% loss, while both the Nasdaq Composite and S&P Midcap
400 indices fell 0.4%. The S&P 500 lost 0.2% and the Dow Jones Industrial
Average closed only 0.1% lower. Unlike the previous session in which the
Nasdaq’s losses resulted from a late afternoon selloff, yesterday’s losses were
the result of opening weakness. On an intraday basis, stocks traded in a
relatively narrow range, drifting from sideways to slightly higher. Each of the
major indices closed near the middle of their intraday ranges, indicating a bit
of indecision into the close.

The positive of yesterday’s session is that volume levels
declined across the board. Total volume in the NYSE was 16% lighter, while
volume in the Nasdaq came in 14% below the previous day’s level. This tells us
that the losses were more the result of a lack of buying interest as opposed to
heavy institutional sell programs. Given that the Nasdaq has had four days of
higher volume losses (“distribution days”) within the past four weeks, it would
have been rather negative if the Nasdaq fell on higher volume yesterday. A
healthy market can generally absorb two to three “distribution days” over the
course of several weeks, but the occurrence of more than four or five of them
within a month is often an accurate warning sign of greater losses to come.
Remember that volume is the footprint of institutional buying or selling
activity and is the one technical indicator that never lies!

The Semiconductor Index
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keeping a watchful eye on in recent days. Because the sector is so heavily
weighted within the Nasdaq, its performance tends to lead the direction of the
Nasdaq index itself. Rarely will the Nasdaq maintain an uptrend without the
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leading the way. Conversely, it is unusual for the Nasdaq to trend lower if the
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order to look for confirmation in each of the Nasdaq’s moves. When the broad
market spiked higher on April 18, the $SOX was leading the way, and did so in
the two days that followed. However, the Nasdaq began to drift back down when
the
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the
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the Semiconductor sector — resistance of a three-month downtrend line:

As you can see, the SOX closed back below its 50-day moving
average yesterday, but it did manage to close off its lows. If the SOX holds
yesterday’s low and attempts to rally from here, the formation of a “higher low”
yesterday could cause the index to generate enough momentum to break out above
its downtrend line within the next few days. Obviously, this would be positive
for the Nasdaq and the broad market as a whole. However, a break below
yesterday’s low would be rather bearish and could easily lead to a resumption of
the current downtrend that has been in place since the high of January 27.

Going into today, we remain overly cautious on both sides of
the market. The Nasdaq has been showing a lot of relative weakness over the past
three days and has given back a majority of its gains from the April 18
breakout, but the S&P and Dow are holding up okay and are still consolidating at
resistance of their prior highs. This is certainly not an environment to take an
aggressive position on either the long or short side of the market. Instead,
consider remaining mostly in cash or, at the very least, simultaneously
positioned both long the relatively strong sectors (oil, gold, steel) and short
the weak ones (tech, biotech). The market has not clearly shown its hand for the
past several months, but it will eventually do so. When it does, expect the move
to be fast and furious as traders who have been positioning themselves on the
other side of the market for the past several months are forced to reverse
direction.

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