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Semiconductor rally stops and downward trend

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In yesterday's "market monitor" on OptionInvestor.com we mentioned a downward trend that traders needed to be aware of in the Semiconductor Index (SOX.X) near $600 and that it might be a target for bulls to sell some strength. That's very close to this morning's high of $601.18 that this index traded up to. It may take some time to eat through this trend and traders in the group need to be cautious.

Semiconductor Index Chart - Daily Interval

The (SOX.X) got close to downward trend. Perhaps those market participants using similar retracement to ours just didn't like the risk/reward of new bullish position. At downward trend risk/reward was about $54/$19. I think support should now be firm at $515. Don't be surprised if bears are waiting to try and cover at the 200-day MA of $555 and 61.8% retracement. I think yesterday BIG jump caught many by surprise.

TranSwitch (NASDAQ:TXCC) was/is a tax-loss bounce we liked. Today's action in the SOX.X had me thinking that traders should be locking in gains after a nice pop in this stock in the past two sessions. With the SOX.X trading fractional red, I don't need to be hit over the head with an iron skillet to lock in a nice gain. For those that feel TXCC has a lot more upside, I'd at least take some profit off the table just in case it doesn't. Try and get some gains under your belt early in the year!

Transports powering higher

I like today's follow through in the Dow Jones Transportation Index (TRAN) as this group packs on an additional 3% gain here at $2,814. This index is once again edging above a long-term downward trend dating back to its May 1999 high of $3,797. Wow! It's still down 25% from an all-time high. In July of last year (2001) we did see this index break above this same downward trend for about 8 sessions, but then fall back below. Still lots of work to be done for an upside confirmation, but today's action is bullish in my view. The longer it continues, the more confidence I begin to get in the broader economy and stock markets. This is one of my "key groups" to be monitoring if not trading bullish in for economic recovery.

Jeff Bailey
Senior Market Technician
Option Investor

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