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Stocks see some downside after rate cut

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At approximately 02:15 EST, the FOMC announced it will be cutting the discount rate by 50-basis points to 2.5%. Initially, there was not much of a reaction, but as time passed, we have seen some weakness in stocks.

The Semiconductor Index (SOX.X) was perhaps the first technology group to show some weakness as this index broke below yesterday's low of 358. This may be an index that traders who may have short/put shares of IBM will want to keep an eye on. In recent weeks, the SOX.X has been showing substantial weakness and traders often times will make some assumptions regarding computer stocks by how this index trades (and vise versa).

Semiconductor Index Chart - last nine months

In our 01:30 EST Update, we outlined a potential bearish trade in IBM and traders might be able to use some of the technicals in the Semiconductor Index (SOX.X) to help with that trade. Our "rolled down" retracement on the SOX.X gives hint that support might be found at the 352 levels should the semiconductor stocks come under further pressure. We must monitor the 52-week low at $343.93 to see if it is broken. MACD on the above timeframe (daily interval) is starting to round out, but it does look like the SOX.X might find some downside near-term to 324.

One thing I like to do is to try and monitor as many sectors as possible and "rank" them by field position. In the past I've described the market as a "snake." The head of the snake is perhaps the strongest and pulls the snake along the ground. The tail of the snake is usually lagging and when something gets hold of it and starts pulling it lower, then the head will turn back to see what is taking place. Only when the tail is able to pull free will we see a market move higher. For technology, the Semiconductor Index (SOX.X) has perhaps become the "tail of the snake" and violations of lows will most likely have an adverse affect on the technology markets. We want to monitor this sector for any type of strength. Current feeling is that any buyers found here are either very aggressive bulls or some shorts locking in hefty gains.

With that said, BULLISH traders will often times fair much better concentrating on parts of the snake that are in the mid-section or toward the upper part of a snakes body. A snakes head usually doesn't look back unless something is pulling on the tail and a trader/investor that is monitoring the tail will often times get a "hint of weakness" before the head actually turn back and gives the trader time to snug up some stops or lock in gains when they've got a profit.

Jeff Bailey
Senior Market Technician

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