Semis have knocked traders' $SOX off, but will head & shoulders roll?

The semiconductors have been as important a sector as any in the equity markets' march upward. The daily chart of the semiconductor index ($SOX) suggests an uptrending channel within which this index has been zigzagging. The recent drop including with the StochRSI dropping down from overbought. Some may see this as a potential bearish head and shoulders pattern, although bulls may see it as a potential "W" or reverse (bullish) head and shoulders. The $SOX could fall all the way to its 200-day moving average, and get support for another bounce up. My monthly chart suggests an interesting larger context.

My trendline markings on the monthly chart show that there remains a little "air" above in case the $SOX is able to make another new rally high. And yet, it also looks like the semis' rally has been a backtest of broken support. By this time it seems the semis may well make it to the upper line on the monthly chart downtrending "fork", whether or not the current pullback goes very deep (it may not be very deep considering we can't expect much pullback in the broad indices now). Assuming it tests that line, we'll get to see "the big test": will the semis be able to get above that? Or be pushed back into another down wave with the bearish fork?

My bias is that it will get pushed back, if the test occurs in May or at least by August. That kind of timing would work with the idea that the broad market crests in that time frame. I know Andre Gratian projects the market won't crest until later, maybe next year. But I'm going to remain wary, based in part on Terry Laundry's current T Theory projections and partly on the Benner-Fibonacci cycle pointing to a significant high during 2010.

NY's Cuomo hits Intel with antitrust suit - just as semiconductors weren't helping equities markets anyway

There's news tonight that New York's attorney general watchdog Cuomo has initiated an antitrust lawsuit against Intel: MarketWatch - New York's Cuomo names Intel in antitrust lawsuit (11/4/09). This is after it's already dropped steeply from the pop up it made after its supposedly favorable earnings report. Yet another example of why we buy and sell on charts, not news or so-called fundamentals! Maybe this sector will do a "buy the news" move, but notice that both Intel and the semiconductor index ($SOX) are leading the Nasdaq and other indices down with retests of the October lows that look a lot like "C" waves down just starting. Actually I'd have to look in on Tony Caldaro's chart lists to see what he's got for the wave count. But there's a gap in the $SOX chart at $270, which is about where its 200-day moving average sits. That would be another substantial wave or so down, probably going along with the broad markets decline we're thinking will materialize pretty soon.

On the monthly chart, the $SOX is above support. But a drop to $270 would place it under that support (from the Bollinger Band midline area). It's possible it will get some support for a little while longer. But remember, in a "C" wave, both news and the price response can be bad! So don't try catching a falling knife. Intel looks rather similar to the rest of the semiconductor index - with a gap that can be filled with a test of the 200-day moving average. That might be a speculative buy level, looking for some amount of bounce from that. Or if you're trying to buy some currently, at least don't forget to use stop loss orders or hedges in case you're trying to catch a short-term bottom - you don't want to catch a falling knife!

"Animal spirits" of the Nasdaq too subdued to give much boost to equities right now

The Nasdaq's substantial underperformance today goes along with the likelihood that the equities rally crested out last week. Below is a chart of the QQQQ. There's a common idea that Nasdaq strength shows the kind of "animal spirits" when investors and traders are more open to risky investments. Conversely, when the Nasdaq lags, it signals more risk aversion, which isn't good for equities in general. Probably not surprising then that TLT did better today (even though it's been looking weak lately). Notice that the semiconductors (SMH chart below) are really weak too - the combination of stochastics and on-balance volume (OBV) indicators is on the edge of making a very bearish move. That's likely to occur if and when the SMH falls under about $24.50 and especially $24.00. It's sobering because for a long time, the semiconductor sector has been considered a leading indicator.

I've also included below the chart showing that the percentage of Nasdaq stocks remaining above their 50-day moving average has fallen under 50%. And the Nasdaq-to-S&P 500 ratio chart at bottom (NDX:SPX) shows that this ratio is rolling over. All in all, today's negative divergence is part of this picture suggesting that the "animal spirits" are likely to continue turning negative and drag equities generally lower. This doesn't mean we won't get reaction bounces, such as the one we're expecting from tomorrow into the end of this week (remember, new month/new money!). But it does suggest that such bounces are likely to be counter-trend, corrective waves.

Postcards from the ledge, post-Bradley as stocks falter

Here are a few "postcards from the ledge" of what may be a "B" wave top in equities that completed on Wednesday, with yesterday having been the Bradley model "turn date" that had stock markets gyrating. While the S&P 500 didn't break under yesterday's 1074.31 intraday low, some other sectors and indices did. I'm not even posting the biotech sector ($BTK), last month's darling which today actually moved under its early October lows. Today, last week's darling the semiconductors (SMH), and the NYSE ($NYA) and Transports ($TRAN), poked under yesterday's low. So - is it confirmed bearish? Well, these seem more along the way at least! There was an interesting potential wedge down at end of day that could be interpreted to provide a boost upward. Conversely, if we're really moving along the C wave down, there's potential for a gap down 3rd wave) on Monday. The market likes to keep some secrets going into the close. So we'll allow for some ambiguity.

But I made the point recently here that to know when the B wave is done, we'll start seeing sectors and indices turning down. That means these charts below may be the precursor of what's to come.

Sox, qqqq - semiconductors losing steam is worrisome for the Nasdaq, probably broader markets

A quick look at the semiconductors. On my monthly chart they did well to get past trendline resistance, but now testing the 50% retrace to their 2007 highs. Intel's "pop and drop" after its better-than-expected earnings report last week was disappointing. With the QQQQ also testing important Fibonacci retracement at its .618 back to the 2007 high, this can indeed be an important area to watch. Semiconductors used to be considered an indicator for the markets as a gauge of growth and buying demand. If that sags it can indicate the other sectors aren't doing so well either.

Game changed in the S&P 500 as bearish H&S evaporated - what's the new game?

Many equities analysts were on to the idea that the S&P 500 going above 912 would be significant, and I referred to it as a "game-changer." So the question becomes, what's the new game? So many eyes were on the bearish head-and-shoulders pattern, and now will be re-evaluating. Tony Caldaro in his update this evening is suggesting that we may be into his alternative Objective Elliott Wave count (see site in links list at right). Andre Gratian had made his comments for the potential in his weekend update (posted here, see labels list at right), and has been sending his updates about all this to his subscribers (hat's off to you, Andre!). Well, I think Andy Askey may have been considering something like this; and of course, Terry Laundry has been looking for more upward movement as well. For myself, I cannot say that I expected a game-changing event to occur, but I can continue to size this up as I see it, and point out that how one responds is as always, a function of one's time frame and trading style. So ... what's the new game? Two places to look for that are Andre's projections, and for those not subscribers I need to refer you to his weekend update (use the labels list at right to locate that). And also, Tony Caldaro's update comments these evening which refer to his alternative count, which he's been showing in the DJIA chart for a long time. Namely, that there's another rally leg higher to go, which may take the S&P 500 to perhaps 1050/1100 (working off my memory right now but you get the idea, above the 1000 level).

I've been mulling over the Elliott Wave possibilities also, because I'm not really satisfied with how the SPX's movements really count out for that alternative count (perhaps Tony has reservations too, I don't know, but I get the impression he isn't necessarily 100% switching over to the "Major C" up idea just yet). In my charts review, I'm including two additional SPX charts below, a weekly and a monthly chart, partly for review of the indicators, and partly to show the Fibonacci levels which include that level at 961/963 that may relate to Tony's pivot at 961. For the time being, I'm leaning on Tony for Elliott Wave counts.

I tweeted quite a bit today, maybe a little much, but a lot of it was about the VIX which I show at right and comment on below. I also tweeted about UNG, and a reader asked if I view today's action there as a bearish engulfing bar. At this point it has that potential, and encroached on that gap so possibly jeopardizing an idea of an island reversal (which of course can never be confirmed without going out in time). As I've pointed out repeatedly, there can be no bullish confirmation for UNG without buying volumes showing up. That still did not look to be showing up for UNG. Volumes started to look better this afternoon, but remained tentative. So yes, as I've also repeatedly said, although max pain suggests $13 or $14 for UNG, and it would be a return trip to the triangle apex at $14 ... without volumes confirming a reversal pattern in UNG, we cannot be certain that it doesn't decline further such as $10.50 or $11.00. There's reason to think $12 can have done it but no guarantee without those volumes showing up - that's just the way it goes when trying to pick a bottom, or a top for that matter!

For myself as one who follows the VIX as closely as I can, I noted what many other analysts noted today - that the VIX poked a new low and then rose throughout the rest of the day as the equities markets continued rising. What I've got that seems unique, is the .786 Fibonacci retracement level back to the February 2007 lows - yes, you read that right - which is at 24.78 (or 24.80 if you round it, and maybe the VIX didn't want to round it!). Today having tested underneath 24.78 and moved back above it, I would expect the VIX to be ready for a reversal upward. Certainly, if the VIX hangs in this neighborhood and "resonates" 24.78 as it did previously around my other Fibonacci retracement level of 33.81, then that would get me on board with the equities markets doing Tony's alternative OEW count of a Major C wave upward yet to come along, or another relatively bullish scenario as Andre is describing and I'm sure will discuss more in his next weekend update.

I did have a Fibonacci retracement in the SPX at 961/963 so if the SPX moves to a new rally high then I would be watching it for reaction there. Along with the Nasdaq where I've got a Fibonacci level at 1912 that can be similarly significant. I've included below the McClellan charts for NYSE and Nasdaq, which are courtesy of DecisionPoint.com (via Stockcharts.com) - and I've placed most of my usual markings on them, including that gap area in Nasdaq which can also relate to the 1912 level I've mentioned. The McClellan Oscillator broke above the declining trendline I've been marking (marking off what was looking like a triangle or wedge in the Oscillator), and it's possible this breakout may assist the indices in moving higher from here. The Summation Index moved up as well, although interestingly for the Nasdaq it's curling back up to the zero line and will have to move above zero in order to look bullish for the longer term.

Among sectors, the one that looks very strong is the semiconductors, naturally because of Intel. Below (under the SPX chart) I've posted a daily chart view of $SOX that just has indicators, and my monthly $SOX chart that has the trendlines I had marked off for this index. These trendlines cannot be real exact on this monthly chart but this clearly is a significant area in terms of trendlines and moving averages. If this index can clear this area to the upside, which the daily chart hasn't done but suggest may be possible, that will be a real positive for the bullish case generally of course.

The dollar has obviously been weak, also the yen, with the euro strong along with equities. There again, these have not moved to new extremes. If I saw the dollar losing support and the euro pushing above resistance (and probably the yen dropping back to and under its 200-day moving average), then these would be signs supporting the bullish equities view too of course. Bonds also fell today, with gold moving higher, and ditto on the point whether these are pullbacks or moving with trend.

That's also the obvious point to make about the broad equities indices and even sectors, of course - there's the likelihood that the strength today in particular will carry them to new rally highs, even though it hasn't happened yet so it leaves us reading the indicators and wave movements. I could also mention the Bradley model chart again (as well as the VIX, or max pain, or even Dow Theory), but does anyone really want to hear about that again?! LOL - almost makes me feel silly for stating the obvious, it's only a breakout if it actually breaks out - in any event, will see!

More buyers must turn out to support a second rally leg higher

I'm posting up some additional charts this evening to illustrate a few points about a few sectors, and then show how a range of equity market indices are faring with respect to their moving averages and volume support. The three sectors I'm showing here are the semiconductors, retail, and banks. Interestingly, retail is one of the heaviest looking sectors, as it already fell under the 50 day moving average and is threatening to move under its May lows - which would also place it under its 200-day moving average (which it actually had moved above). The semiconductors (shown at right with SMH) are a little better off, also above their 200-day moving average and only poked the 50-day moving average intraday. In both, however, the buying volumes really dropped off, and have moved under their 30-day moving average (the red line in the "OBV" indicator window). Using the 30-day moving average with the On Balance Volume (OBV) helps us see how relatively bullish or bearish the volumes are, and is a useful adjunct to other indicators.


Just looking at the raw volume bars, you can see that there's been more selling in the retail sector (RTH). This is not an encouraging sign for the rest of the economy.

The same charts constructed for the banking sector tell a generally concerning tale, as I've been showing. This time I'm showing the ETF's for both a primary bank index (KBE) as well as for the regional banks (IAT). The regional banks are definitely in weaker position, having dipped relatively lower on the move down since early May. Those two charts are below.

I've also included smaller versions of charts with the same indicators, across a variety of the equity market indices. In some cases they are trying to stay above their 200-day moving averages, in others they remain below. The OBV indicators for some look relatively stronger or weaker than in others. Many are showing negative divergence, such as with the MACD and CCI indicators. Looking across the charts, it's evident that buyers will have to show up in force in order to support the idea that we're just seeing a moderate pullback that will lay the groundwork for another rally leg up. Meaning - we need to remain alert to the possibility that the March lows will be retested.

These charts show why you cannot assume semiconductors will save the markets

Just this weekend I prepared and posted here a review of the big-picture chart of the semiconductor index ($SOX), in Semiconductors' recent strength may be like moth to a flame - with resistance at broken trendline (6/14/09); pointing out that it isn't necessarily in a bullish posture. I've grown a little concerned because I've seen some analysts asserting that semiconductors will lead the markets upward. Well ... maybe - but don't assume it! From a chart perspective, it looks like they can help lead the markets to new lows. On the big-picture monthly chart in my earlier post referenced above, I showed that it's at significant resistance from a broken trendline, and from an Elliott Wave perspective it can be counted as being only part of the way along a very large wave "C" down that will take it to new lows. Today, let's see how it is doing on the daily chart. First, we see that after having displayed bearish divergence, StochRSI is now documenting that the $SOX is weak, and might be oversold except that an upturn wouldn't be confirmed unless StochRSI turns up. Otherwise, it is definitely possible for StochRSI to remain in that low position for a long time during downtrending. Second, it displayed relative weakness today, dropping even though the broader markets perfomed somewhat better. Third, we see that it's doing a heavy test of its 50-day moving average. Fourth, although that 50 dma recently did a supposed "golden cross" upward from the 200 dma, that 200 dma is still declining. It remains possible for both the semiconductor index and then the 50 dma to cross back below the 200 dma.

The slow-moving DMI-ADX indicator in the bottom window of the chart is a very big clue that this index is not uptrending. During an uptrend, the green positive DMI line will be above 20 or 25 and preferably above 30, and the black ADX line will move up to similar levels. The black ADX line never did follow along with that on the rally, and the green DMI line has dipped with the possibility of a cross-under of the red (negative) DMI line that can move up again. The other indicators are telling the same story - the rally has ended for now, and there is no guarantee that there's enough momentum in this index to avoid new lows. The entire rally can be counted as an "abc" in Elliott Wave terms as a completed bear-market rally. There is no Elliott Wave count that I can see that gives any guarantee that this index will consolidate and move higher once again - that much is safe to say.

Of course I cannot guarantee that the semiconductor makes its next movement to new lows. But I'm definitely leaning to the interpretation that it will, based on the big-picture chart position; so that's my current position and point of view. If my interpretation is wrong, then we'll certainly know because it will get support either from its 50 dma or its 200 dma (again)! If I'm right, then it will move under both support levels, with a very good chance of finally rolling over to new lows.

Semiconductors' recent strength may be like moth to a flame - with resistance at broken trendline

I prepared a chart about the semiconductor sector ($SOX) for my UBTNB3 site, and once I was done I decided to also post it here. After extracting some trendlines based on the monthly chart (below), it looked like this index has returned to "kiss-back" up to a parallel line within a larger downtrending fork. Doesn't mean it couldn't break that resistance, but it should run into some rougher sledding as it's getting back to moving average resistance too. There may be another downsloping line that could be a target, drawn beginning at the late 2007 swing high and steeply angling down; if that's a magnet then price could either poke above the fork midline, or could bounce around for a while as it uses time as a way to get to where those lines intersect later in time. Then again, clearing above both these lines would put the semis into a more bullish mode.

Actually I made a typo in my notes on this chart. That trendline was not broken early 2008, it was touched then. It broke that trendline (t/l) in late 2008. Now it looks like it's at the kissback level to it.