A view point worth reading on SOX technical direction....
Between The Lines
The SOX looks to a ‘friend' for help
The Qs may have already blocked the upward path
By Tomi Kilgore, CBS.MarketWatch.com
Last Update: 5:54 PM ET Jul 30, 2000 NewsWatch
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NEW YORK (CBS.MW) -- Teetering on the brink of a steep decline, the semiconductor sector has solicited the help of a technical "friend" to help in its fight back to the top. The odds that it can make it, however, may not be worth the bet.
Looking at a weekly chart of the Phlx Semiconductor Index ($SOX: news, msgs), you can see that a "double top" is beginning to rear its ugly head. See how the index surges to an all-time high of 1,362.10 during the week ended Mar. 17? That's the first top. The second is the run-up to a high of 1280.84 in the week ended June 23.
If the SOX were to fall below 934.73, the "double top" will be fully exposed. What makes that level so important? Let's look between the lines.
In March, the bulls sprinted ahead of the pack at a record pace. They pulled back in April and May to catch a second wind. In June, a second attempt to regain the lead fell a bit short. If they fall too far behind the pack, the race is over.
On Friday, the SOX fell quickly to an intraday low 934.73 where it enlisted the help of a friend: the trend line. It was enough to propel the index to an intraday high of 987.53 before closing up 0.8 percent at 957.28. You've heard it said before, "the trend is your friend."
Take out your trusty ruler and line up the lows of the week ending Oct. 22 (476.11) and the week ending May 26 (821.58). If you extend the line through the present, you'll see that Friday's low sits right on that line. A drop below it would indicate that the slope of the 9-month up-trend has been broken.
If this sounds a little familiar to you, it should. In a previous column, it was noted how a double top in the Nasdaq Composite ($COMPQ: news, msgs) led to a decline that took the tech-heavy index more than 40 percent below its all-time high. That double top was confirmed when a trend line using the October and January lows was broken in early April.
The SOX's fate, however, may already be determined.
Let's take a look at the triple Qs (QQQ: news, msgs). Each "cube" is a share of a unit investment trust that holds the stocks of the 100 largest and most-actively traded companies on the Nasdaq stock exchange. They can be bought and sold like any other stock, and track the Nasdaq 100 index ($NDX: news, msgs). Included in the Nasdaq 100 are 6 SOX components, with a combined weighting of approximately 13.4 percent.
On Friday, the Qs fell to an intraday low of 86 before closing down 5, or 5.4 percent, at 86 7/8. Along the way, a couple of key technical supports were broken.
The first was the June 1 close of 87 3/8. On June 2, the Qs gapped higher, opening at 92 5/8. Gaps tend to create support (or resistance) because sellers (or buyers) prior to the gap were left with their mouths open the following day. And nobody remembers the breakeven level more than somebody who is losing money.
You do the math
The next support was 87 5/32. If you take the difference between the year-to-date low of 72 1/4 (Mar. 24) and the recent high of 102 1/16 (July 17) and divide by 2, you get 87 5/32. This means that bears have take back more than half of what they lost in the last two months. How's that for leaving the bulls disillusioned.
The next level to watch for on the downside is approximately 83 5/8. At that point, the bears will have retraced 61.8 percent of the recent bull run.
Thirteenth-century mathematician Leonardo di Pisa -- ghost name Fibonacci -- discovered a numerical ratio (0.618) that existed throughout nature. As many consider the market a living, breathing, man-eating animal, if a "retracement" surpasses 61.8 percent of a previous move, it takes on a mind of its own. New lows become the next target.
If the Qs take a moment to reflect, look for strong resistance between 89 1/2 and 90 1/2. Throughout June, there were a series of lows that landed in that area. And support once broken, tends to become resistance for the same reason a gap can provide support. The bulls spent a lot of energy trying to protect that territory. Now that it was overtaken, they should be happy to break even there.
Where does the weakness among the biggest and baddest of the tech sector leave the SOX? Well, as many have said in the past, trend lines are meant to be broken. |
