The major market indexes are holding the bulk of their intra-day gains as the major averages get a needed rebound from their 50- day SMA's. However, it's my opinion that the bounce will be short-lived as bears begin to get some confidence and look for rallies back near the shorter-term 21-day SMA's as entry points for another leg lower.
This morning, I've been going through some of the more actively traded stocks in the market and taking some notes of stocks that may be considered "bellwether" type stocks in their respective sectors, focusing attention on those that have broken below their 50-day SMA's that might hint the stock is one that lacks favor as it relates to the major market averages getting a bounce above their 50-day SMA.
Shares of Sun Microsystems (NASDAQ:SUNW) $3.21 -4.7% is one stock that's headed against the NASDAQ-100 Index (NDX.X) 1,032 +2.6%. Sun Microsystems (SUNW) was one of many technology stocks that benefited from broader-market bullishness, but today trades sharply lower and break below its 50-day SMA and may well be under pressure after noted newsletter writer Fred Hickey said he remains bearish on technology and ranks Intel (NASDAQ:INTC) $18.06 +2.78% as one of his favorite shorts. Hickey also said while he views Dell Computer (NASDAQ:DELL) $27.47 +3.15% as an excellent company, he also believes it a "superb short," citing Dell's P/E of 34x earnings is "too high for an industry that is sinking."
Another chart that I was looking at in shares of semiconductor equipment maker (NASDAQ:AMAT) $14.18, shows this stock below its 50-day SMA of $14.61 and technically weak relative to the major market averages. This technical action may also jive with Hickey's notes that Applied Materials (AMAT) trades at almost 5x sales versus the 2x sales the stock hit at the trough in 1998. At more than 2x revenues, Hickey points out that AMAT shares would sell at $6.00.
While the major indexes look to rebound from their 50-day SMAs, traders will not begin monitoring the rounding shorter-term 21- day SMAs for resistance. Technicals there may be similar to that found in mid-September, when the major averages had declined from a relative high on profit taking, but after what some viewed as simply profit taking from the relative highs, found resistance at their 21-day SMAs, then turned lower to new 52-week lows. At that time, the bullish % charts were nearly identical to current levels and I'd expect some bears to be looking for rallies to short, with the thought that Friday's lows will be broken for a further decline.
On Friday, enough internal damage was done to the narrower NASDAQ-100 Bullish % ($BPNDX) from www.stockcharts.com to have this index falling further from "bull correction" to "bear alert" status. That action now has all three of our narrower based bullish % in the Dow Industrials ($BPINDU), S&P 100 ($BPOEX) and NASDAQ-100 ($BPNDX) all in "bear alert" status.
As such, bullish traders that have held some gains toward losses may look for rally exit points or take on a more defensive approach to selling covered calls in those sectors where the bullish % charts have reversed from above the 70% levels and have become more defensive after being above the overbought levels.
Using Applied Materials (AMAT) as an example, according to Dorsey/Wright and Associates, the semiconductor bullish % (BPSEMI) which they track as a large basket of stocks reversed from the 74% level to current reading of "bear alert" (very similar to the NASDAQ-100 Bullish % ($BPNDX) from www.stockcharts.com, after reading as low as 8% in late September. This sector bullish % has a "habit" of running the spectrum of 70%-30% bullish over the course of a 3-month time frame and currently depicts a sector where supply is outstripping demand.
As I write, I'm getting an upside alert in the Gold/Silver Index (XAU.X) 77.69 +0.52%. The sector had been in negative territory since the opening bell, but now looks to bid and takes out Friday's high. May be some short-squeeze action taking place here. In play here is the 82.46 level on a near-term basis, which is 80.9% retracement if taken from 54.67 to 89.02.