But the larger pattern for the SOX is one of the indexes that has kept me thinking the March rally may have been just another bear market rally. In last Thursday's newsletter I showed the weekly and daily charts of the SOX to point out why I think we have a very good setup for another leg back down. This is the closest to a pound-the-table short play as I've seen in several months. Whether it will work out or not will only be known in hindsight.
The weekly chart shows the bearish wave count for the move down from July 2007 and the parallel down-channel. The wave count supports the need for another new low (for the 5th wave). The bounce off the November low looks like a perfect little bear flag pattern. The SOX needs to drop below the March low to confirm the end of the bounce. That's obviously a long way back down just to get to the bottom of the flag pattern (near 190). How far it will drop from there is the question (or if will even drop to the bottom of the flag pattern).
SOX weekly chart:
The daily chart shows the flag pattern from November (at least I'm calling it a flag pattern until price breaks out the top of it) and the parallel channels show how well the SOX trades technically. I thought it would reach 257 for two equal legs up from November which have had it reaching the top of its flag as well as the top of the larger down-channel shown on the weekly chart. As shown in pink on the daily chart that could still happen. It takes a break below 225 to tell us the rally from March 3rd has finished.
SOX daily chart: