Where’s the Naz headed? You’ll see in this chart

With the bond market closed Monday and in
celebration of the Columbus Day holiday, equities in the American
markets staged a second straight day of sideways chop. After a miniscule gap up
on the Dow
(
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indices spent the greater part of the trading day in a tight range. Some late
day selling pushed the S&P down by 8.57 (losing 0.72%), the Dow by 53.55 (giving
back 0.52%), and the Nasdaq Composite by 11.43 (shedding 0.55%). Internal
indicators were negative with declining volume outpacing advancing volume by a
ratio of almost 4 to 1 on the NYSE and 2 to 1 on the Nasdaq. The NYSE logged
1,360 more decliners than advancers at the close (readings sub 1000 are
considered solidly bearish and should not be taken lightly) and the Nasdaq was
behind the eight ball by 857 by the same metric. Overall volume declined for a
second day in a row as well. Keeping in mind that overall volume on Friday was
below the 50-day average, tells us that volume today was downright anemic. This
is however, typical action on a holiday.

Weakness was spread out over a number of sectors, with homebuilders ($DJUSHB)
leading the decliners posting an 3.68% loss on the day. Morpheus has been
bearish on this sector for some time now and continues to favor the short side
in the building names. Natural Gas stocks
(
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commodity continued to back off on the NYMEX from its record $14.00+ per million
BTU’s hit last week, ending at a two week low of $12.975. Oil services
(
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Oils
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1.5 and 2.5% from their respective opens. Another sector which was also ended
noticeably lower was the Philadelphia Semiconductor Index
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SOX |
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fond of saying in this publication, “as goes the $SOX, so goes the Nasdaq.” That
being said, the index warrants a closer technical look as it broke down below a
key pivot in yesterday’s trade.

 

The chart above is a weekly of the Philadelphia Semiconductor Index. There
are mainly two key technical events that you should be paying attention to in
the graphic. The first is the break of the secondary trendline as
annotated. Generally, when the secondary, or steeper, trendline is violated, the
odds greatly increase that the stock or index will continue to fall to the
primary (flatter) trendline. Notice as well that a move back to the primary
trendline, currently having a terminus at the key psychological level of
400, would pretty much all but erase the entire gain of the April to July rally
in the semiconductors. Note the prior highs at the 440 area as well. Its pretty
obvious at this point that semis will test this area very soon. The question is
whether they will stop here (as old resistance becomes new support) and bounce
or continue down to the 400 level. One clue may lie in the daily charts.

 

In the daily chart of the index above, notice the 200 ma (blue line) which
runs across the bottom of the chart, currently residing at the 433 area. 200
MA’s on daily charts usually act as “magnets”, pulling price action to them from
above or below, and more often than not, holding them there as bulls and bears
fight it out to decide if this all important moving average is support or
resistance. With yesterday’s bearish close on the $SOX, it appears the odds
favor at least a move to this 433 area, which is currently 13 points below us.
Going back briefly to the first chart, notice that the 50 MA weekly (red line)
is also right at 433. This confluence of technical indicators provides a
relatively high probability that the $SOX will test this area soon. This
expected weakness in the $SOX will certainly act as a drag on the Nasdaq
Composite, which has been showing relative strength to the Dow and S&P, and is
quickly becoming the only bright spot in an otherwise increasingly bearish
looking landscape.

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