CHIP BREAKDOWN AND FALLING SUNW PULL NASDAQ LOWER -- QQQQ TESTING SUPPORT

SEMICONDUCTORS BREAK DOWN ... Semiconductor stocks are having a very bad chart day. Chart 1 shows the Semiconductor (SOX) Index shattering its 50-day moving average and a rising support line drawn under its September/October lows. The recent failed attempt by the SOX to stay over its 200-day moving average also bodes badly for the group. Bad chart action in the Semiconductor Holders (SMH) can be seen in Chart 2. To make matters worse, downside volume yesterday and today has picked up. That's not a good sign. Another bad sign is coming from Intel (Chart 3). The big chip bellwether is also breaking its 50-day line on rising volume. All in all, a very bad start to the new year for the chip stocks. In my view, today's breakdown warrants additional selling in the chip group. Unfortunately, that's also taking a negative toll on the Nasdaq market.

Chart 1

Chart 2

Chart 3

SUNW SETS ON THE NASDAQ ... The biggest Nasdaq loser is Sun Microsystems. Chart 4 shows the stock tumbling beneath its 50-day line and falling to the lowest level in more than a month. The volume bars show heavy selling over the last two days. The fact that the recent slide started from the 5.6 level also carries long-term significance. The weekly bars in Chart 5 show that SUNW has failed its last three attempts to break through that chart barrier. Needless to say, the fall in SUNW is having a negative impact on the Nasdaq market. As is the drop in the SOX Index.

Chart 4

Chart 5

NASDAQ 100 SHARES ARE WEAKENING ... It's never a good sign when the Nasdaq 100 Shares (QQQQ) are the day's weakest index. But that's the case today. The daily chart shows that the QQQQ has tried unsuccessfully three times to stay over 40. It's now testing initial chart support at 39. The daily MACD lines have already turned down (see red arrow). Also of some concern is the fact that the QQQQ/S&P ratio has turned down (see blue arrow). Since August, Nasdaq 100 leadership has been good for the rest of the market as evidenced by the rising ratio line. The recent loss of Nasdaq leadership is a potential negative. Two key support levels to watch are 39.00 and the 50-day average at 38.66. A close under the latter would be more serious.

Chart 6