Option Investor
Market Updates

Semiconductor Index and rolling retracement

Printer friendly version

The recent weakness in the Semiconductor Index (SOX.X) has me rolling DOWN my retracement bracket to try and ascertain some bearish targets for this index to help ascertain levels where we might find support. Since the trend is down, I'm using these more as targets for bearish trades than I am as entry points for bullish trades.

Semiconductor Index Chart - last 10 months

Past retracement brackets used on the SOX are no longer providing levels of support, therefore I like to use a technique I've developed called "rolling retracement." This technique is more of an art that a science, but what I'm trying to do is uncover levels of potential support and resistance based on the belief that market makers are doing the exact same thing (or have been) to control their inventory risk. I've fit the retracement bracket to try and uncover past inflection points where it appeared that levels of support and resistance have formed for no apparent reason other than retracement levels where the bulk of market makers had been bidding stocks more aggressively (support) and sitting on offers more aggressively (resistance). The old adage of "support broken becomes resistance" is the added theory here. My thinking is that a market maker bidding Semiconductor stocks at 578 was doing OK, until he/she could no longer take on any more inventory as the MARKET was not buying the inventory in sufficient quantities. Once the 578 level was lost, that MARKET maker then had risk to 528 and becomes a more aggressive seller of inventory to lessen his/her risk. My thinking now is that there has undoubtedly been some market makers noticing their order flow had dried up at the 578 level and started shorting into rallies above 578 along with some of market participants. Those market makers that were shorting at 600-620 may do some covering at the 528 level. At that time, they'll be able to get a feel for order flow. If buy side is strong, then support at 528 levels should hold. If order flow is weak, the market maker must protect inventory to the 478 level.

Now think about this and incorporate bullish percent data as it relates to MARKET risk. If you're a market maker that understands the bullish percent and what it says about strength/weakness in the markets, you're aware that we are very close to bullish percent levels found in March and April. I think market makers are now preparing themselves for a test of the 478 level in the SOX. Therefore I do think the bias is to the downside here and we can use the retracement brackets along with the bullish support data to back such a notion.

Jeff Bailey
Senior Market Technician

Intraday Update Archives