Trading/T.A. Guru Boucher's analysis foretells possible imminent breakdown of the internet sector
from tradehard.com 7/30/99:
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Special Report: Internets on the Edge
7/30/99
By Mark Boucher
With all the attention being paid to market volatility, and especially the risks of Internet stocks, the following special report is intended to raise awareness of how important it is to avoid unnecessary trading risks and to be able to read market patterns as they develop.
There are five major Internet indexes: IIX, CINX, BUSNET, HMQTINET and DOT. Right now all these benchmarks have been tracing out head-and-shoulder top patterns since December 1998 and have now reached critical junctures.
Figure 1 shows a chart of the Chicago Board Option Exchange Internet Index (CINX); the head-and-shoulders pattern and breakdown level are clearly evident.
Figure 1. Chicago Board Options Exchange Internet Index (CINX), daily. Source: Quote.com.
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None of the patterns in these indexes have triggered yet, but they are getting close. If these indexes all penetrate their respective breakdown levels (see below), the downside risk for Internet stocks increases dramatically; declines on the order of 35%, and quite possibly much more, could take place.
One of the reasons the situation is so potentially explosive is the high correlation between rising Internet stock prices and margin debt. Fed Chairman Alan Greenspan actually expressed concern in his recent testimony before congress that much of the margin debt in the stock market was concentrated in the Internet stocks. A reversal in the Internet sector could unleash a flood of margin calls and forced selling.
The breakdown levels for the key Internet indexes based on their head-and-shoulder patterns are:
IIX < 250
CINX < 385
BUSNET < 129
HMQTINET < 350
DOT < 495
The breakdown levels for stocks are:
AMZN < 84
AOL < 89
YHOO < 117
INKT < 80
LCOS < 34
MSPG < 27
CNET < 38
EGRP < 30
USWB < 17 1/2
The following stocks have already broken down:
LVLT
QWST
SPLN
EBAY
SPYG
The following Internet stocks have held up so far:
ADBE
SGI
QCOM
SFTBF
Whenever classic patterns like head-and-shoulders or double tops and bottoms appear in a wide range of instruments in the same industry, and they all break down within a very short time period, the signal becomes very significant. This is all part of reading the market--being able to synthesize the information from various related indexes and the stocks in them. When they're all shouting the same message, it's in your best interests to listen carefully.
You should continue to monitor these stocks and indexes carefully in the coming days and weeks to stay abreast of a potentially significant change in the outlook for this sector and its implications for traders.
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