Watch this key level on the SOX

As anticipated, the Semiconductor
Index ($SOX) broke out above the high of last week’s consolidation, pulling the
Nasdaq higher as well. Both the Nasdaq Composite and small-cap
Russell 2000 gained 0.3%, while the S&P Midcap 400 Index advanced 0.2%. Relative
weakness was found in the S&P 500 and Dow Jones Industrial Average, which closed
lower by 0.1% and 0.2% respectively. Given that both the S&P and Dow closed
higher for six consecutive sessions, yesterday’s fractional losses were
inconsequential. Selling pressure two hours before the close caused the S&P to
finish just below the middle of its intraday range, but the Nasdaq grinded its
way back to close in the upper third of its range.

Turnover declined across the board yesterday. In the Nasdaq,
total volume was 2% lighter than the previous day’s level. Volume in the NYSE
declined by 8%. In both exchanges, volume came in below 50-day average levels.
With the stock market closed for the Thanksgiving Day holiday on Thursday and a
shortened session on Friday, we expect volume to remain lethargic until next
week. Since choppy and erratic trading often results from lower than average
volume levels, it’s an even better reason to be in “SOH mode” (sitting on
hands). In the Nasdaq, advancing volume beat declining volume by a margin of 1.9
to 1. Conversely, the NYSE ratio was marginally negative by 1.1 to 1.

Due to recent weakness in the U.S. dollar, the CurrencyShares
Euro Trust
(
FXE |
Quote |
Chart |
News |
PowerRating) is starting to look pretty bullish. This ETF, which mirrors
the price of the Euro vs. the U.S. dollar, has been consolidating in a narrow
range for more than a week and is now poised to breakout above its weekly
downtrend line from the June 2006 high:

We are stalking FXE for a potential long entry if it
rallies above the November 10 high (circled). Since it is already near its
52-week high, it would not take a lot of additional buying pressure to
subsequently propel FXE to a new high. There are a handful of other ETFs that
mirror the price movements of various currencies versus the U.S. dollar, but FXE
is one of the better looking setups. A weak dollar has also been a factor in
gold’s recent strength. We remain long the StreetTRACKS Gold Trust
(
GLD |
Quote |
Chart |
News |
PowerRating)
because it is consolidating in a narrow, sideways range above its 20-day MA. It
should soon make a run at a fresh high. Both GLD and FXE have a low correlation
to the direction of the overall broad market, which is ideal considering we are
primarily in “SOH mode” with regard to the stock market.

In yesterday’s newsletter, we illustrated how the $SOX index
was poised to move above the high of its recent consolidation. Not only did
yesterday’s 1.8% gain cause it to rally above a three-day sideways range, but
the $SOX also broke out above resistance of its weekly downtrend line that began
in January 2006. As long as the $SOX remains strong, the Nasdaq will have a
tough time going much lower. In case you bought one of the semiconductor ETFs we
discussed yesterday, let’s take a look at where the $SOX is likely to encounter
its next resistance. To do so, we need to apply

Fibonacci retracement lines to the longer-term weekly chart:

Looking at the chart above, the dashed blue line marks prior
resistance of the primary downtrend line. Since prior resistance becomes new
support after the resistance is broken, that descending trendline should now act
as support on any pullback in the $SOX. As for the Fibonacci resistance, notice
that the $SOX closed right at its 61.8% Fibonacci retracement level. In
technical analysis, the 61.8% Fibo retracement is considered to be one of the
most pivotal levels because it often acts as a major resistance level that
triggers a reversal and continuation of the prior trend. But if the $SOX
retraces beyond the 61.8% Fibonacci retracement level, the “last line of
defense” is at 78.6% (76.4% is another Fibonacci number that is less commonly
used). Beyond that, the odds of it completely retracing all the way to the 100%
level and beyond are very high. Since the $SOX just broke out above a 10-month
downtrend line, there should be enough follow-through momentum to carry it
beyond resistance of its 61.8% retracement level. If long any of the
semiconductor ETFs, consider selling into strength as the $SOX approaches its
78.6% retracement at the 522 price level.

Open ETF positions:

Long GLD and PBW (regular subscribers to

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