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Stocks firm as session progresses

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Stocks have firmed from the opening of trading and equities are mixed. Sector strength is found in the retailing sector as the S&P Retail Index (RLX.X) is up 1.46% at $888, but still below a level of psychological and technical resistance of $900.

Semiconductors are showing today's early sector weakness as the Semiconductor Index (SOX.X) is down 2.7% after yesterday's after- market earnings warning from Novellus (NASDAQ:NVLS).

Novellus Systems Chart - $1 box

While yesterday's news from Novellus (NASDAQ:NVLS) is negative and the bar charts give hint of downside to the $33 level, the supply/demand picture is still bullish. In the "market monitor" I profiled a bearish trade in shares of Novellus on the break below retracement at $38.44 (profiled at $38.20), but when I pulled up the point/figure chart I became more cautious on that trade. In my bood, supply/demand reigns supreme and the point/figure chart tells me that demand is still in control of the stock. Notice the triple-top buy signal at $41. Current action is that of a "normal pullback."

There are a couple of other things weighing on my mind with a bearish trade in shares of Novellus at this time. I'm a firm believer that all the bad news comes out at the bottom, I've seen/heard it too many times in the past.

I've also pointed out in the past the old saying among point and figure chartists that "the first sell signal in the upward trend is a buying opportunity." This has me not thinking that a potential trade at $35 is necessarily a great shorting point, but rather a point where bears that have been short the stock and experienced the recent move to $42 come in and cover their shorts on the weakness. Sometimes, that action along with the "bad news coming out near the bottom" is the buying opportunity for the next move higher.

For that to occur, a bull doesn't want to come into the stock on a potential trade at $35, but look for any type of bullish sharp reversal from that point following any trading at $35. If there's "smart money" involved in the stock that knows the future is bright for Novellus, the stock may very well reverse from a sell signal in the $32-$34 range. I have a retracement bracket level at $32.39 that I can cross correlate with the point/figure chart.

I pointed out to traders the "first sell signal in the upward trend" of PeopleSoft (NASDAQ:PSFT) that took place back in October at the $23 level. Subscribers know that I've been rather bullish on PSFT since October 10th.

Jeff Bailey
Senior Market Technician
Option Investor

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