Why It Pays To Watch Transitions

December 13, 2002
Dave Landry

On Friday, the Nasdaq opened weaker and continued to sell
off fairly hard in early trading. Then, after drifting sideways for much of the
morning, it attempted an early afternoon rally. However, this failed as its sell
off resumed. For the day, it lost over 2 1/2% of its value. This action has it
closing poorly and closing in on its 50-day moving average.

The S&P put in a similar performance. It’s now tagging
its 50.

The rollover in the indices is more pronounced when using
the “Bow Tie” (10-SMA, 20-EMA, 30-EMA) moving averages. Here is the
Nasdaq:

And, the S&P:

As I often do on Fridays, here are the weekly charts for
perspective.

The Nasdaq:

And, the S&P:

So what do we do? The semis followed through nicely to
the downside on Friday. Further, other areas of technology such as software,
telecom, Internet and now biotech all appear to be rolling over. More
importantly though, is that sectors outside of technology such as the banks and
retail are now rolling over too. On the upside, about the only thing that
continues to do well is the gold stocks. Therefore, considering the above, once
again, transitional shorts (e.g., First Thrusts, Bow Ties, Inverted Cup &
Handles etc.) could still offer the best opportunities.

Looking to potential setups, even with Friday’s sell off,
the semis still look like they have additional downside. With that said, Power
Integrations
(
POWI |
Quote |
Chart |
News |
PowerRating), in the weak integrated circuits sub-sector (a), looks
like it has the potential to continue its rollover out of an inverted cup and
handle/First Thrust.

Actel
(
ACTL |
Quote |
Chart |
News |
PowerRating), in the specialized semiconductor
sub-sector (a), also looks like it has the potential to continue its rollover
out of a First Thrust.