SEMIS SHOW LEADERSHIP -- NASDAQ 100 BOUNCES OFF LONG-TERM SUPPORT -- BLUE CHIP AVERAGES STILL IN TRADING RANGE -- BASIC MATERIALS AND ENERGY STOCKS ARE STILL LEADING
SEMICONDUCTOR HOLDERS BOUNCE OFF 200-DAY LINE... In a reversal of roles, the semiconductor group has moved from one of the weakest parts of technology to one of the strongest. While Internet and networking stocks have been helping to pull the Nasdaq market lower, the chips are finally lending some support to the market. That role reversal is seen mainly in the group's relative strength line. After declining from mid-November to mid-January, the RS line for the chip group has been rising over the last month. The ability of the SMH to stay over its 200-day line is also encouraging. It rose above that long-term resistance line a couple of weeks ago. Whenever that happens, the 200-day line should provide new support on minor pullbacks. And that's exactly what it has done. After retesting the 200-day line yesterday, the SMH bounced off it today. The only negative for this week so far is the fact that downside volume has exceeded upside volume. We'll keep an eye on that.

Chart 1
NASDAQ 100 BOUNCES OFF CHART SUPPORT... The Nasdaq 100 Shares (QQQQ) are also retesting long-term support. The ability of the QQQQ to stay over the (red) 200-day line means that its "long-term" trend is still up. Its inability, however, to cross over the (blue) 50-day line means that its "short-term" trend is still down. Sooner or later, one of those lines will have to be crossed. Whichever one it is will tell us a lot about the direction not only of the Nasdaq but the entire market. To turn its short-term trend back up again, the QQQQ needs to close above its 50-day line and last week's peak at 38.50. The 9-day RSI line is showing a slight "positive divergence" which hints that a rally attempt may be in the offing. Keep an eye on the QQQQ/S&P ratio line as well. It's been dropping since early December. That hasn't been good for the Nasdaq or the S&P 500. A close over the (blue) 20-day EMA would be a positive turn for both.

Chart 2
NO DOUBLE TOPS YET ... I've received a number of questions about the possibility of a "double top" in the Dow and the S&P 500 indexes. It's true that a "double top" starts with two peaks -- like the ones shown in Charts 3 and 4. But to be a real "double top", prices have to close under the middle trough. That would mean a close under 103.39 in the Dow Diamonds (Chart 3) and 116.37 in the S&P 500 SPDR (Chart 4). As long as prices stay over the January lows, the trend since the start of January qualifies as a sideways consolidation or trading range. Volume has been heavier on the downside this week (which is bad), but prices have moved back over their 50-day averages (which is good). Until those January lows are broken (and as long as prices remain above their 200-day averages), we have to assume that the major trend of the market is still up. It may not have much more to go on the upside, but it's still up. Which brings us back to the Nasdaq market. If the blue chip averages are going to stay in the current trading range -- and maybe even attempt another upleg -- they're going to need some help from the Nasdaq market. That's why the current Nasdaq test of support is so important -- as is new leadership by the chip stocks.

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Chart 4
NOVELLUS IS UP WHILE YAHOO IS DOWN ... Two of the biggest percentage movers in the Nasdaq market today were Novellus and Yahoo. One went up while the other went down. The strong action in Novellus contributed to the day's gains in the semiconductor group. The chip leader is already challenging its December high. Its rising relative strength line shows its strong performance versus the Nasdaq 100. At the same time, Yahoo tumbled below its 200-day average on huge volume. Its relative strength line has been falling versus the Nasdaq for four months. There are a couple of messages in those two charts. One is that it's better to be long a stock with rising relative strength and out of (or short) a stock with a falling RS line. The other lesson is that in a technology group struggling for stability, semiconductors appear to be a safer bet than Internet stocks.

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Chart 6
BASIC MATERIALS AND ENERGY ARE STILL LEADING... Although the market had an up day, two of the strongest groups were once again basic materials and energy. Both ETFs shown below closed at new highs. That means that money flows still favor commodity-type stocks. In the long run, that's not necessarily good for the rest of the market because that usually leads to higher inflation and rising interest rates. One of the nice things about being in either or both of those two groups is that instead of worrying about budding inflation, you're already benefiting from it.

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