BROKERAGE UPGRADE HELPS CHIPS -- BIOTECHS FALL -- SMALLER STOCKS HOLD UP OK -- NASDAQ HOLDS 1900 SUPPORT -- DOW LOOKS OVERSOLD

SOX STILL SHOWS DECENT RELATIVE STRENGTH ... A brokerage upgrade this morning gave a boost to the Semiconductor (SOX) Index and kept it in a position of relative strength. The chips stayed in the plus column all day even as the major market averages traded in the red. The SOX's relative strength line hit a new three-month high last week after bottoming in early September. The SOX still needs to close over its October peak near 410 to turn its intermediate trend higher. After that, it still needs to clear its 200-day moving average. Given the fact that the chip group has been the year's worst performer, and given recent investor preference for technology stocks, I continue to believe that this is a low risk group that investors can do some bottom-fishing in. While most chip stocks bounced today, the one that caught my eye was Teradyne. Chart 2 shows the SOX leader touching a three-month high today. The unusually big green volume bars last week also reflect some heavy accumulating going on in the stock. Notice the recent jump in its relative strength line versus the SOX.

Chart 1

Chart 2

GILEAD LEADS BIOTECHS LOWER... Last Monday (October 18) I wrote that I thought the biotech pullback was over. Obviously, that's hasn't been the case. Over the last week, the Biotech Index has fallen to a two-month low and was one of today's weakest groups. Some of that may be due to a general lack of interest in a weak healthcare group. More likely, it's the result of disappointing performance in individual biotech stocks. Chart 4 shows Gilead Sciences falling hard on Friday on rising volume. It's getting dangerously close to its 200-day line. Biogen Idec has already broken that long-term support line. So far, it looks like I got this one wrong.

Chart 3

Chart 4

Chart 5

SMALL AND MIDSIZE STOCKS HOLD UP OK ... While the large-cap blue chip averages continue to sag, small and midsize stocks are holding up pretty well. The next two charts show the Russell 2000 Small Cap Index (Chart 6) and the S&P 400 Mid Cap Index (Chart 7) holding above moving average lines and their late-September low. Their relative lines have been rising versus the large-cap S&P 500. It's worth keeping on eye on the two smaller stock indexes. That's because they usually lead on the upside if and when the market starts to rally. Their ability to stay over chart support is at least mildly encouraging for the rest of the market.

Chart 6

Chart 7

NASDAQ HOLDS SUPPORT -- DOW LOOKS OVERSOLD... After a bad start, the market ended the day only marginally lower. No major chart changes took place. The Nasdaq Composite managed to stay over initial chart support near 1900 which has kept the short-term trend from turning down. At the same time, the Dow is looking oversold. Its 9-day RSI line has dipped under 30 (oversold territory) for the first time since early August. That doesn't change the direction of the current downtrend, but does suggest that the Dow drop is overdone. The blue chip averages may also get some relief from basic material stocks. After falling heavily a couple of weeks back, the Materials Select SPDR (XLB) is stabilizing above its September low and its 200-day average. Energy stocks ended today in the loss column. With gold testing its 2004 high near $430, gold stocks continue to shine. For a discussion of why gold may replace oil as the next hot commodity, please see my earlier market message (October 25, 2004).

Chart 8

Chart 9

Chart 10