Will the SOX Stay Up?

If the benchmark chip index is indeed in a reversal, there will need to be more evidence in terms of chart action and up-volume

By Paul Cherney

It was semiconductors that drove the Nasdaq higher on Thursday, Sept. 9. There was a technical break higher at 1:00 p.m. ET and that break higher coincided with a better than expected earnings release from National Semiconductor (NSM ). Much of the advance after 1:00 pm was fueled by short-covering and short-term momentum players.

Look at a chart of the SOX. The only people who have been making money in the semis since the end of June have been the bears. It was time for some short-side profit-taking, but their buying influence is a short-term market event. If the lift in prices cannot attract bigger volumes, that means that few people on the sidelines have been inspired to move back into the markets.

So far, the total trading volume on the Nasdaq is shy of robust volume levels, but this week is still part of the end of the summer vacations; next week, all the desks on the Street should be occupied and that will be the time that the volume will have to come in. People like to watch the semis as leader for the Nasdaq -- that has been true for many bull markets -- so there is still great interest in the group. But since the Aug. 12 low closes for the Nasdaq and the S&P 500, the semis have only continued to trend lower and that raises real questions about relying on the price action in the SOX as a crystal ball for Nasdaq prices.

If this is going to be a reversal for the SOX, there will need to be more evidence in terms of chart action and increased volume on the up days. I like to see an ABC (a.k.a. 1-2-3) reversal pattern to insure that the buying was not just short lived short-covering. Increases in volume would be a sign that investors on the sidelines are moving into the markets.

Today's action caused Nasdaq 60-minute measures to assume configurations that I associate with some follow-through for the next trading day, but sometimes the follow-through is only 1 to 3 trading hours. It would be natural to see a stall in the Nasdaq's lift (especially if the lift is being fueled by the short-term concerns of b4ears covering shorts.

Thursday's price action was good enough to bring Nasdaq measures of up volume and down volume back to neutral with a slightly positive bias, so in the short-term, I am no longer concerned about a capitulation sell-off. But, today's price action did little to help the S&P 500, it only languished sideways and that might more or less continue to be the case on Friday.

Some higher prices look likely but there simply is not enough bullish evidence to suggest a sharp advance yet.

In the short-run, the worst immediate downside risk for the S&P 500 would probably be limited to prints of 1,110-1,094.

The Nasdaq still represents a potential drag on the markets, but time will offer more evidence as to whether the nascent rebound in the SOX is just a short-term market event or a reversal and trend higher.

Immediate intraday resistance for the Nasdaq is 1,870-1,896.31 with a focus at 1,870-1,876. Next resistance is 1,912-1,933.

Nasdaq support is 1,867-1,849, then 1,843-1,819, but a close under 1,830.30 would probably initiate a period of price weakness.

Immediate resistance for the S&P 500 is 1,123-1,130.33, with a focus at 1,124.60-1,127.02. This year's June price action established more formidable resistance in the 1,129-1,146.34 area, with a focus of resistance 1,132-1,140.

Cherney is chief market analyst for Standard & Poor's

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