SOX BREAKS DECEMBER LOW AND PULLS MARKET DOWN -- OIL IS NEARING A TEST OF ITS ALL-TIME HIGH AT $40 WHICH IS A DANGEROUS SITUATION FOR STOCKS AND THE ECONOMY

SOX BREAKS DECEMBER LOW... Earlier in the week I suggested that the fate of the Nasdaq market was tied to the Semiconductor (SOX) Index which was trying to bounce off support at its December low. Unfortunately, the Semiconductor Index took a turn for the worst today and pulled the Nasdaq down along with it. Chart 1 shows the SOX falling under its December low to the worst level in nearly five months. Its next test will be the 200-day moving average. The SOX/S&P 500 ratio line peaked in mid-January and has fallen to the lowest level in five months. A number of chip stocks suffered notable losses on Friday including Applied Materials, Intel, Texas Instruments, Teradyne, and Xilinx. Because of its heavy weighting in the SOX Index, KLA Tencor had the most bearish influence.

Chart 1

KLA-TENCOR HITS SIX-MONTH LOW... KLAC is the most heavily-weighted stock in the SOX Index (10%) and, as a result, carries a lot of influence on the direction of the SOX. Chart 2 shows today's bearish action in the stock. It had already broken support at its December low and has been trading under its 200-day average since the end of February. Today's decline just made a bad chart pattern worse.

Chart 2

APPLIED MATERIALS BREAKS 200-DAY LINE... Applied Materials also had a bad chart day. Not only did the stock break support at its December low, but it broke its 200-day moving average for the first time in a year. That's not good for the SOX, which isn't good for the Nasdaq, which isn't good for the rest of the market. Thanks largely to the SOX Index, the technology sector was the week's worst performer. That's not usually a good sign for the rest of the market. As evidence of that, three of the five biggest percentage losers in the S&P 500 today were from the chip group -- National Semiconductor, Teradyne, and Texas Instruments.

Chart 3

S&P 500 FADES ON FRIDAY... On Thursday, I explained that the weekly and monthly indicators for the S&P 500 had turned negative and suggested that fact would limit any short-term bounces. That seems to have been the case this week. The S&P tried unsuccessfully to get through its first resistance barrier at 1125 which was the low formed in late January/early February. One of the rules of charting is that a broken support level becomes a new resistance level. A more important test is taking place along the (green) 100-day moving average. On the weekly chart, that corresponds to the 20-week moving average which has acted as a support line for a year. Any decisive break of the 100-day line would signal a much deeper correction in the S&P. There's also not much sign of improvement on the daily indicators. The 14-day RSI line is meeting resistance at 50, and the MACD lines are still negative.

Chart 4

ADOBE AND NUCOR JUMP ON VOLUME... There were some impressive winners in the S&P 500 today. The most impressive was Adobe which jumped sharply on very heavy volume. The software stock needs to get through 40 to turn its short-term up again. Nucor led a rally in a strong steel group. NUE gapped higher today on very heavy volume. Gains in steel stocks made the Material sector the day's strongest group.

Chart 5

Chart 6

BJ SERVICES HITS RECORD HIGH... With crude oil prices climbing over $38 this week, it was no surprise to see that the Energy sector was the week's strongest group. The leader in the energy patch was BJServices. Its monthly chart shows the stock breaking out to a new all-time high. Rising energy prices, and energy sector leadership, is another negative factor for the rest of the stock market.

Chart 7

NASDAQ 100 LEADS MARKET LOWER... The Nasdaq 100 QQQs were the worst percentage losers on Friday and reflected continuing weakness in the largest technology stocks. The daily chart shows the QQQ ending the week on a down note. The only saving grace was the relatively light volume. With the SOX leading the way down today, it looks like the QQQ will probably test its December low and its 200-day average just above 34. The final chart shows the hourly bars for the past week. Of particular notice was the last hour's volume bar. In the last hour of trading on Friday, the QQQ fell to a three-day low on the heaviest volume for the week. That shows some fairly heavy selling near the close on Friday.

Chart 8

Chart 9

EVEN ECONOMISTS ARE GETTING WORRIED ABOUT RISING ENERGY PRICES... Even economists are starting to talk about the negative impact of rising oil prices. When they start to notice, we know it must be serious. Crude closed over $38 for the first time in a year. That puts crude within striking distance of $40 which has been a ceiling on oil prices for more than twenty years. The monthly bars in Chart 10 show oil peaking at $40 during 1990 in the months leading up to Desert Storm. It stopped at $40 prior to the second Iraq War last spring. The inflationary spiral of the 1970s ended with crude peaking at $40 during 1980. Which brings us back to the present situation. Oil is nearing a test of that historic $40 barrier. If it breaks through it, watch out. That's not going to be good for bonds or stocks. And it will surely catch the attention of economists who may even start to downgrade their economic forecasts. Fortunately, stock market investors see things long before economists do. That's why they've been selling technology stocks and buying into the energy sector since January.

Chart 10