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NASDAQ just won't crack

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Many market bears most likely felt this morning's plane crash near Queens would have the NASDAQ cracking to the downside, but nearly 7 hours later, the NASDAQ has managed to move into positive territory and our 38.2% retracement level from "fitted retracement" looks to have come into play near 1,781.

NASDAQ Composite Index Chart -

Today I got an e-mail from a subscriber wondering about this "rolling" or "fitted" retracement and where they can read about it. I don't have the answer to that other than OptionInvestor.com, IndexSkybox.com and premierinvestor.net. This is a "little known" technique that we've been telling subscribers about for more than a year. A technique that simply take a "range," then divides that range much like a pie into several pieces.

When a market has been declining, we're usually "rolling down" and "fitting retracement to lower levels. Yes, you could attach retracement brackets back 10-years to find a retracement range, but who is still trading levels dating back 10-year ago? All I have been doing with retracement on the NASDAQ-Composite is "rolling down" retracement to give us levels of potential support/resistance to monitor in our trading. Those levels that result from a "fitted retracement" like that above are then used to help ascertain risk/reward going forward. Just as a market maker would be doing in his/her inventory for stocks he/she is responsible for making a market in.

Today's pullback in the NASDAQ Composite came to 1,782.48 and this is pretty close to our "fitted" retracement. The "fit" comes from the range found at the April 4th low (1,619) and top of May 22nd near 2,307. The RESULT was the 2,044 level (currently bullish trader's target), the 1,781 and 38.2% retracement level (currently bulls risk), 1,457 at 61.8% retracment (bulls risk if 38.2% and 50% are violated). Notice how the 61.8% retracement level did a pretty good job of serving as support during the sharp declines just after the terrorist attacks of September 11th, near NASDAQ 1,695.

Subscribers will also note how it sure looks like the NASDAQ Composite has "stepped up" the scale of retracement, with every level of retracement broken to the upside having acted like support.

On October 10th, the NASDAQ Comp. closed at 1,626, just above the 50% retracement level of 1,619. For 6 sessions, the NASDAQ stayed above that 1,619 level, then on October 19th, the NASDAQ traded a low of 1,628 and bounced higher to 38.2% retracement of 1,781. It wasn't until November 5th, that the NASDAQ Comp closed above the 1,781 level, but today's action seems somewhat similar to a "test of past resistance" and we've seen a bounce. Perhaps this morning's weakness to the 1,782 level was just a chance for market makers to fine tune their inventories and get things square. Positions that they were forced to short into that were moving higher (didn't have bullish inventory to sell) were able to be bought back on weakness.

In my mind, the first sign of potential trouble in the NASDAQ Composite would be a close under the 1,781 level.

Looking for trouble in sectors

In late September, you could look practically anywhere and find "trouble." However, the bullish percent charts from Stockcharts.com and Dorsey/Wright and Associates told us the markets were at extreme oversold levels.

The Semiconductor sector and bullish percent (BPSEMI) chart from Dorsey/Wright showed just 6% of stocks in that group having a buy signal on their point/figure charts in late September. This correlated with a 0% reading in the NASDAQ-100 bullish percent ($BPNDX) from Stockcharts.com.

As of Friday, the Semiconductor Bullish Percent reading from Dorsey/Wright is now at 70.45% and has entered an "overbought" level (under 30% is oversold and over 70% is overbought). In May of this year, the Semiconductor Bullish Percent reading reached a level of 76%, before declining to the eventual September low reading of 6%. This is a sector to be careful when establishing new bullish positions and one area of the market more susceptible to some extensive profit taking.

Semiconductor Index Chart -

I would be cautious about adding new bullish positions to my investment account in semiconductor stocks at current levels. There are some that are undoubtedly still bullish candidates, but the bullish percent data gives hint that bulls are taking on some risk in the sector currently. Support should be firming at the 428 level and any dip below the 30% bullish percent level would be back into an "oversold" condition, right near a decent looking support level. Would be looking at writing some covered calls. If looking long some stocks in the group, try sticking with those breaking out of bases that are not overextended or having made a major move off of a bottom.

Bearish traders in the sector need to be careful too. Just as the bullish percent achieved a very oversold level of 6%, doesn't mean the sector can't achieve a level of euphoria at 94% bullish. "What's good for the goose is good for the gander." Some would also say, "What's good for the bear, is also good for the bull."

Right now, the bulls have the bulk of the risk in the sector, but they've also got some momentum. I prefer to wait for some type of rolling over in MACD before establishing too much of a short/put position in the group.

Jeff Bailey
Senior Market Technician
Option Investor

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