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Index Wrap

SOX, glamour queen of tech-land

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This past week brought earnings back into the forefront now that Iraq as a military foe and danger has receded - of course, we still have to win the "peace" and this may be the toughest challenge. The market rally was lead by the tech heavy Nasdaq which was in turn led by the key Semiconductor Index (SOX) - see chart below. Earnings figures released by key tech leaders Intel (INTC) and Microsoft (MSFT), among others, were well received.

The Nasdaq (Composite - COMPX) was up nearly 5 percent for the week to 1425 - a substantial gain and even more so when you look at it versus the S&P 500 (SPX) advance of 3% and the Dow's 1.7%.

While the Nasdaq Composite (echoed by the Nasdaq 100, NDX) has made a new closing 3-month high, my focus is on COMPX's ability to pierce resistance in the 1450-1460 area, around the mid- January top. The current rally is being led by what was a very oversold Semiconductor index - more on that shortly - which is one very volatile index that that can turn on a dime.

The S&P 500 (SPX) is now trading above its 200-day moving average, a bullish plus, but there should continue to be two- sided trading swings. As I've said before, the market appears to be in an overall bottoming process but it can take some months to create a strong recovery "base" in many key stocks.

Short-covering in the tech stocks by large hedge funds is a dynamic here and the whole rally looks "technical" rather than led by any big shift in the fundamental outlook for the economy and stock earnings.

Moreover, bullish sentiment among traders jumped to an extreme last week and calls into question the staying power of this rally in the short-term. I continue to suggest trading the range and the next best new entry should be into index puts, so take call profits on rallies.

Led by the spark provided by an upbeat sales forecast from Nokia (NOK) and to general hopes for an economic rebound, traders and investors pulled up the Nasdaq Composite by another 2.2 percent or by 30.78 points, to 1425.50, producing a gain of 4.9% during a holiday-shortened week (nearly 7% for the year).

The Dow rose 80 points on the week to 8337.65, which is now virtually unchanged for the year. There is shift in money coming into the greater glamour of tech stocks and out of the conservative Dow-300 type companies. In the "bang for the buck" department, I noticed the Journal quoting these startling gains for the year - Yahoo up 53%, Amazon 32% and eBay by 33%. Gold anyone? I don't think so, when more adventuresome investors see these stats!

Both stock and bond markets close Friday for the Good Friday church holiday. Without the U.S. market, don't expect much European and Asian action.

Stocks took off in the afternoon after a Federal Reserve survey of manufacturing activity in the Philadelphia region showed only a mild decline, less than feared. Businessmen interviewed for the survey indicated their expectations that the business climate is improving.

In spite of the holiday shortened week, trading volume on the NYSE was not much off its daily average of late, as options expiration related activity took up the slack from traders heading out early for a long weekend.

Tech stocks were strong from the opening - as mentioned, Nokia, the big cell phone maker, put out a forecast on improving sales, as did chip maker Broadcom (BRCM) - the company said that sales were up during Q1.

With 101 million shares exchanged, Sun Microsystems (SUNW) ended the day as the most-active Nasdaq stock, losing 8 cents (2.4 percent) to close at $3.24. SUNW performance disappointed analysts as well as investors - A Merrill Lynch analyst said "Sun's report highlighted the continuing depressed state of the high-end hardware market. The company said IT spending might not be worsening, but that it's sure not getting better". Amen brother!

The Dow average lagged after Honeywell announced Q1 earnings that were lower than consensus estimates. However, 27 of 30 stocks in the Dow were higher on Thursday. The S&P 500 managed to tack on 1.5 percent for the day, or 13+ points to wind up the week at 893.58 - a possible test of the psychologically important 900 level is now only a few points away.

Weekly unemployment claims for the past week came in higher than expected, remaining above the 400,000 level which seems to be a benchmark figure for what is trouble for the economy or not.

Oil prices rallied on fears that OPEC will cut back on supply with the Iraq war winding down - nearby crude oil futures rose $1.37 to $30.55. Gold prices also rose a bit, reflecting continued nervousness about war and terrorism. However, T-bonds were little changed - the 10-year note was off 5/32, to wind up yielding just under 4 percent.

The dollar up higher as the greenback closed FOREX trade in New York at 119.66 Yen, up from 119.47 and the euro slide against the U.S. dollar to $1.0876 from $1.0914.

The Semiconductor Index (SOX) daily chart leads my chart parade -

This one could also be entitled: "more than a dead cat bounce?" Probably yes. SOX has made a series of higher (down) swing lows as it has climbed up from its bottom way down in the 210 area.

Now that the Index has exceeded a 62% retracement of its Oct. -
Nov. advance, it seems likely that SOX can continue to work its
way back to a test of the prior high at its mid-Jan. peak at 348
- although there is also still the matter of a more recent high
- at 338 to be overcome first.

What I will be watching for technically with the Semiconductor Index is whether a new high will be "confirmed" by a similar higher high in the RSI indicator. If a bearish divergence sets up it suggests to me that this sector index, and probably the Nasdaq as well, is a candidate for profit taking on any long calls and a switch to a put play as the next trading opportunity.

S&P 500 Index (SPX) - Daily & Hourly charts:

SPX is now trading above the important 200-day moving average which is a technical plus as I've been saying before - you can see how this line acted as resistance in recent trading. So, 880 now is looking like the area that the bulls have to defend.

Interesting that the see-saw price action has created a situation where the S&P 500 is not yet in any kind of overbought extreme. As with the SOX however, it will be a test of sorts if the Index gets to a new high without a confirming new high in the 14-day RSI or the 21-period hourly stochastic, as per the indicator graphs below -

The 10-day TRIN is not at any kind of extreme. The rally can be seen in one way however, as a "continuation" of the rebound predicted by the two prior high readings showing very high selling volume, relative to buying, over the prior 30 days.

Last but not least, as I suggested last week, if Monday brought a further rebound from the hourly trendline, such bullish action would suggest further upside, which is exactly what happened. Who would have thunk it! If you have a choice between thinking and believing a trendline like this, believe what you see on the chart.

900-905 looms as the key resistance. I suggest shorting and put buying strategies on signs of a faltering rally in this area. It seems unlikely that SPX is going to sale through there - but, stay tuned! 875, at the trendline - the intersection of which moves higher over the week, is an important technical support line to watch over the week to come. 865 is a must-hold support to keep a bullish chart going for this Index.

S&P 100 Index (OEX) - Daily & Hourly charts:

445 and 455 are the near support/resistance levels to watch in the early part of the week. 460 is the key prior top that must be overcome to get this rally kicked into 3rd. gear. A break of 445-440 would suggest downside follow through.

The S&P 100 chart looks like a carbon copy of the S&P 500 (SPX) chart - EXCEPT that I do have one indicator showing here that provides my most bearish short-term key indicator, which is related to market or trader "sentiment".

Traders got pretty bullish by week's end. Although there was option unwinding due to expiration, my equities call to put daily volume ratio is usually not that thrown off and the extreme is marked with a red arrow on the left daily chart side below -

I figure that a downside reversal is coming in the next few sessions. The question in my mind is more on whether 440 gets pierced and prior support at 430 gets tested or not.

A couple of hourly closes above 460 - my 450 suggestion last week seems to not be enough leeway - AND the ability to hold this level on subsequent pullbacks, is the only development that would make me wonder if holding puts was getting too risky.

I'll bank on the 1-day extreme seen so far in my Call to Put options "sentiment" indicator. Another day or two of CBOE equity call volume running around double daily equities put volume, would make this a surer bet and pull up the 5-day moving average.

I use a 5-day average as a sometimes confirming indicator, but a 1-day extreme like the one shown above is usually enough to signal that a countertrend move is coming. After years of watching this, I still find it uncanny that when the majority of option traders gang up on one side so heavily, it so often signals that an unexpected opposite is coming.

Nasdaq Composite Index (COMPX) - Daily & Hourly:

The back and forth two-sided trading swings had nudged the daily stochastic model into a neutral to slightly oversold area, so no extremes are suggested in terms of this market being overbought EXCEPT on an hourly chart basis.

But if the COMPX takes out that prior double top and get up to the 1450-1460, it will be - overbought enough to suggest that the Composite won't go to high for the year, or not for long. 1350 continues to be the area of the expected low end of a 1350-1450 trading range.

The Nasdaq has been a good market to trade given the number of back and forth price swings. Remember the "island" bottom (yellow circle on the hourly chart)? - a good chart pattern "signal" then. Now what? Look for a top again such as seen in January and another trading swing to ride down. More is seen on the QQQ chart lag to suggest that this rally probably doesn't have big strong "legs" as they say.

QQQ charts - Daily & Hourly:

Near support 25.3 and resistance at 27.4 - the Q's are lagging the Composite and the volume is in a downward trend. Someone forgot to tell the Nasdaq 100 followers that there is anything here to get excited about.

To suggest a breakout of the triangular consolidation showing on the daily chart will require a close that clears 28-28.25 AND - do I sound like a broken record - the ability to hold above 27.75-28 on subsequent pullbacks. The idea being that resistance once exceeded in a solid rally, should "become" future support on pullbacks.

I think we got a weak rally to the top end of a range rather than a change of heart among the legions of investors and money managers who would rather NOT get enticed back into tech stocks. We're seeing an overbought reading on our hourly stochastic models here also.

25.30 is the key trendline support. A break of this area would suggest that QQQ can get back to the 23.5-24 area again. Short the rallies, buy puts and stay tuned.

The principle bullish note is provided by that fact of the possibility that the triangle is the stock "coiling" or compressing for another up leg and the fact that the 14-day stochastic is showing upside momentum from the lower end of its range.

So let them prove themselves - the key technically for any bullish outlook is an ability for the Q's to penetrate the cluster of prior price peaks - hey, "ppp" may be a catchy new acronym.

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