BASIC MATERIALS LEAD MARKET LOWER -- PROFIT-TAKING HITS NASDAQ -- CISCO BREAKOUT ATTEMPT FAILS -- SAME WITH THE SEMIS

COMMODITY STOCKS ARE FALLING ... Almost anything related to commodities fell hard today. Gold stocks have been falling for a week. And so have oil stocks. Another big drop in crude today pushed the Energy Select Sector SPDR ( XLE) under its 50-day moving average for the first time in three months (Chart 1). That's not surprising considering the heavy volume during last week's price plunge. Normally, that would help the market. Not today. Problem is today's selling wasn't limited just to gold and energy. Basic materials were the day's weakest sector. Chart 2 shows the Materials Select Sector SPDR losing 2% on the day -- and on rising volume. Two of the hardest hit groups were aluminum and copper.

Chart 1

Chart 2

ALCOA AND PHELPS DODGE BREAK MOVING AVERAGES... Charts 3 and 4 show the technical damage done to Alcoa and Phelps Dodge. Alcoa has fallen under both moving average lines on rising volume. Phelps Dodge (copper) has broken its 50-day line -- also on rising volume. Their falling relative strength lines show loss of leadership by both former leaders. When former leading groups like basic materials start to fall, something else has to rise to the occasion to take their place. Up to today, technology was doing its part. Even technology stocks succumbed to profit-taking today.

Chart 3

Chart 4

CISCO FAILS BREAKOUT ATTEMPT... Earlier today I wrote about the importance of Cisco's attempt to break out over resistance at 20. The daily bars in Chart 5 show that the attempt failed -- at least for today. After opening at the highest level in nearly three months, the influential technology stock closed down at 19.73. And it did so on heavier volume. That contributed to some profit-taking in the networking group. It also didn't help a Nasdaq market that was testing its own resistance barrier.

Chart 5

OVERBOUGHT NASDAQ PULLS BACK FROM 2004 HIGH ... Earlier today I showed the Nasdaq Composite Index trying to stay over its early 2004 peak at 2153. Unfortunately, it couldn't do it. The Nasdaq fell 36 points (-1.70%) to lead the rest of the market lower. The "double top" in the RSI line didn't help either. Also disturbing is the unusually heavy volume on the Nasdaq. At the very least, the combination of important overhead resistance (at the early 2004 high), a short-term overbought market (RSI over 70), and heavy downside volume is a bad short-term combination. Although the Nasdaq trend is still up, some traders will no doubt be encouraged to take some profits. Part of the reason has to do with the point & figure chart shown in Chart 7. I mentioned earlier today that a price drop to 2115 would result in a downside "three-box reversal" on the p&f chart which some short-term traders take as a profit-taking signal. We got that downside reversal today. No actual sell signal will take place on this chart, however, unless the Nasdaq drops to 20.40. Although no serious damage was done to the Nasdaq chart, today's heavy selling does suggest that more short-term weakness probably lies ahead.

Chart 6

Chart 7

SEMICONDUCTOR UPDATE ... Yesterday I showed the Semiconductor Holders (SMH) challenging their 200-day moving average and attempting another upside breakout at 35. The semis sold off today with everything else. That prevented an upside breakout at 35 in the SMH. It also kept the SMH below its 200-day average. No serious chart was done. It's important, however, that the SMH stay above its late November low near 32.5.

Chart 8