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Market Wrap

X Marks The SOX

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        06-05-2001        High      Low     Volume Advance/Decline
DJIA    11175.84 +114.32 11196.53 11043.44 1.11 bln   1987/1091	
NASDAQ   2233.66 + 77.73  2244.23  2167.24 1.82 bln   2461/1363
S&P 100   662.09 +  7.61   663.93   654.05   totals   4448/2454
S&P 500  1283.57 + 16.46  1286.62  1267.11           64.5%/35.5%
RUS 2000  516.48 +  9.16   516.48   507.32
DJ TRANS 2917.42 + 39.18  2920.73  2875.03
VIX        21.22 -  1.61    23.00    21.11
Put/Call Ratio      0.55

X Marks The SOX

Programmable logic device maker, Xilinx (NASDAQ:XLNX), ignited a rally in tech shares Tuesday. The company reported Monday evening that its business was showing signs of improvement - that is, increased visibility.

In case readers missed Monday's Market Wrap, that evening Xilinx officials reported that they were seeing a slowdown in cancellations in orders. In addition, they also said that inventory turnover had improved. While part of Xilinx's improved visibility may be a product of capturing market share from its competitor Altera (NASDAQ:ALTR) - who warned not too long ago - it may also portend a recovery in the tech food chain, part of which starts with the beleaguered telecom business.

Coincidentally, Lucent Technologies (NYSE:LU) - the epitome of a beaten down tech/telecom company - reaffirmed its fiscal third-quarter guidance Tuesday morning. Lucent officials reported that their cost cutting efforts would result in a sequential improvement over the company's second-quarter operating loss of 37 cents per share. While the Lucent news didn't necessarily suggest that demand in the telecom space was picking up, it did lend to the idea that business isn't getting any worse, which was well received by the market.

The combined guidance of Lucent and Xilinx set the tech sector a light, with solid internals and decent volume on the Nasdaq. Trading on the Nasdaq reached 1.8 billion shares exchanged, which is in-line with the exchange's 50-day average. What was especially encouraging with the guidance delivered by Lucent and Xilinx was the combined impact on shares of tech bellwether Cisco Systems (NASDAQ:CSCO), which gained $1.81 on the day, or 9.2 percent. Lucent is a competitor of Cisco's, and Xilinx is a supplier to the networking giant.

Indeed, Xilinx boosted the Philadelphia Semiconductor Index (SOX.X) above the 620 resistance level we addressed in Monday's Market Wrap. The SOX traded as high as 656 Tuesday, before pulling back on profit taking near the close. Nevertheless, the chip index ended with a 6.74 percent gain Tuesday.

I've tried to make it clear in past columns, that it is my belief that the SOX leads the Nasdaq, hence my focus. And going forward, the SOX does have some resistance around the 665 level (plus or minus 10 points). Beyond that general area, the BIG hurdle for the SOX is the 700 level - for both psychological and technical reasons. There's some supply on the point & figure chart on the SOX up around the 700 level, and 700 is also the current site of the 200-dma. In short, I think if the SOX convincingly clears the 700 level over the short- or medium- terms, the Nasdaq Composite will make its way towards 2500. In terms of pullbacks, the SOX should now find support around the 625 (plus or minus 5 points) area.

While the Nasdaq's price action was impressive Tuesday, and volume was pretty good, too, there are a couple of disconcerting developments I see on the daily chart. For one, the COMPX is testing the 50 percent retracement from its peak in late January to its trough in early April. The 50 percent retracement currently sits at 2250. This particular retracement bracket has been a very good trading tool recently, as evidenced on the chart below.

My second cause for concern is that the COMPX appears to be forming a head-and-shoulders (H&S) top, which is a bearish indeed. The left shoulder was traced on May 1st at 2232, and the head was traced on May 22nd at 2328...is it a coincidence the COMPX closed at 2233 Tuesday? One point away from its left shoulder? (While some technicians may disagree, I'd put the COMPX's neckline at 2100)

I appreciate human psychology and its tendency to fulfill prophecies, thus my reason for pointing out the H&S top in the COMPX. And if this pattern is indicative of a pullback in the COMPX, the bearish price objective is roughly 1870. (Difference from head to neckline subtracted from the neckline.)

Conversely, the Nasdaq could certainly reject the H&S, advance above the 2250 retracement level, scare the shorts and retest its relative highs around 2328. If this scenario plays out in the coming days, momentum-based strategies may work best.

If the Biotechnology Index (BTK.X) continues on its tear, the Nasdaq will have a better chance of rejecting its H&S top. The BTK was bolstered by positive analyst comments Tuesday morning, delivered by J.P. Morgan. Although, the BTK does appear overbought at current levels, and bullish traders in the sector might start looking to book gains in the coming sessions.

Insofar as the Dow Jones Industrial Average (INDU) is concerned, it's comfortably back above the 11,000 level and judging by Tuesday's action, feels like it wants to test its relative high at 11,350. We got confirmation from both the Bank Sector Index (BKX.X) and Cyclical Index (CYC.X), with a modest breakout in the former. I'd suggest monitoring the BKX and CYC in an attempt to game the INDU in the coming sessions.

Second to the Xilinx and Lucent guidance Tuesday, perhaps the best piece of news was the lack of a major earnings warning. And the longer we go without a big blow-up in the tech and telecom spaces, the more nervous the shorts grow and the more encouraged the bulls grow.

On deck Wednesday morning is Hewlett-Packard (NYSE:HWP), who is delivering its analyst meeting at 11:00 AM EST. Keep this event in mind when trading Wednesday morning as H-P can have an impact on several hardware makers, such as IBM (NYSE:IBM), EMC (NYSE:EMC) and Sun Microsystems (NASDAQ:SUNW), among others. The H-P conference could move the market one way or another, so stay tuned into that event. (You can log into the conference call through Yahoo's Finance site.)

Keep an eye on the key resistance levels I set forth tonight, especially in the Nasdaq. The shorts are growing nervous, and the buyers could be waiting higher so any advance from current levels could be perpetuated to the upside in excess. But just keep in mind there are a few red flags being waived, such as the extreme level of complacency indicated by the Market Volatility Index (VIX.X). The VIX fell to yet another new yearly low Tuesday at 21.22. Then again, with the VIX at such low levels, premiums are decreasing, which can benefit speculators willing to take on risk and those looking to lock in recent gains with some cheap hedges.

Questions, concerns and comments are welcome at: Contact Support

Eric Utley

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