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Equity futures mixed

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Equity futures are mixed this morning and we're seeing S&P futures hover right near break-even, while NASDAQ futures are down 5 and Dow futures are up 37. Fair value today is $10.62 with program buying set at $12.80 and selling set at $8.54.

Big Blue posts big number

A big part of Dow futures trading to the upside this morning is International Business Machines' (NYSE:IBM) robust earnings report from yesterday. IBM reported that its fourth-quarter profit rose 28 percent, beating consensus estimates. IBM's fourth-quarter diluted net income was $2.7 billion, or $1.48 a share, up from $2 billion, or $1.12 a share in the year-ago period. Yesterday, shares of IBM closed at $96.68 and traded as high as $110 on Instinet yesterday after 4:00 EST.

Expect volatility in the Semiconductors short-term

Traders with a weak stomach might want to avoid the semiconductor sector near-term as trading could get wild and this means volatile. Technically, there are a lot of good things that can happen, but one supply/demand tool indicates the group is getting very close to an overbought level. So close in fact that this indicator has not seen this level of bullishness since September of 2000. Readers that are familiar with the "bullish percent" should visit www.dorseywright.com and view one of their charts on the bullish percent for the Semiconductors. While this index can continue to get more "bullish" than current levels, the current level of "bullishness" indicates higher risk for the bulls. Here's a supply/demand chart of the Semiconductor Index (SOX) from stockcharts.com and you'll see why this chart indicates higher prices, but I'll point out that it says nothing about risk.

Semiconductor Index Supply/Demand Chart - 20-point scale.

Yesterday's trade at 700 set up a quadruple-top buy signal and indicates a major level of resistance has been broken. Traders will note how the above chart recently showed three rallies to 680 (on the chart) and every rally was met with selling driving prices lower. Yesterday the 700 level was achieved creating a "quadruple-top buy signal." Purely looking at supply/demand, the above chart would say that the bulls have made some headway yesterday and for a moment, however brief, there was more demand at 700 than their was supply. Yesterday I mentioned I'd like to see a close above 700 on the bar chart and now readers know why (to give bears something to think about). What concerns me about some of the internals like the bullish percent is that the trading that occurred at 700 could be a bull trap. Time will tell, but traders need to know, that the internals indicate "overbought" while the charts indicate an index or group that is strengthening. In summary, this is not to make traders second guess their trades in this index, but be alert that one indicator, the bullish percent, indicates a higher degree of risk for the bulls today. Lehman's analyst Dan Niles has forgotten more about the semiconductor sector than I'll ever know. Yes, he was bullish in September, when I was rather bearish, but if Dan Niles is right this time and there's still some rough times ahead, then the current "overbought" INTERNALS from supply/demand make his case. If he is wrong, the above chart would make a bulls point. Time will tell, but traders are now alert and NOT complacent.

Semiconductor Index Chart - last four months.

The bar chart I marked up yesterday with levels for traders to be looking for correlate nicely and may help traders draw comparisons between supply/demand charts and bar charts. One of the "keys" to technical analysis is understanding where different levels of supply may exist. Yesterday I set up a bullish trade at the open in the SOX.X that targeted the 800 level. Traders that use several tools (not just bar charts or supply/demand charts) may be able to "confirm" that their targets are realistic and achievable. Both of these charts indicate that 800 is a realistic target, but the "bullish percent" tells us that the risk in the group is at a high level. Traders can use this information to MANAGE their trades.

Jeff Bailey
Staff Analyst

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