SOX IS HELPING NASDAQ FIND SOME SUPPORT NEAR 2000 -- DOW IS OVERSOLD, BUT DON'T EXPECT TOO MUCH ON ANY BOUNCE

NIBBLING AT NASDAQ 2000... The market is in an oversold condition from which a rebound is possible. That doesn't turn its chart bullish. But some bottom-fishers are starting to do some nibbling -- especially in the Nasdaq market. Chart 1 shows two reasons why. First, the Nasdaq Composite Index is testing its 200-day moving average. Second, its 9-day RSI line is starting to turn up from oversold territory under 30. The late January Nasdaq bounce took place with the RSI at the same level. There are at least two other reasons why the Nasdaq is trying to hold in this area. They're shown in Chart 2.

Chart 1

TWO MORE SIGNS OF NASDAQ SUPPORT ... Chart 2 shows the Nasdaq advance since last August from 1750 to its late-December peak at 2200 followed by its recent decline to 2000. The green horizontal lines are Fibonacci retracement levels. The most important one is the middle line. First, it's the 50% retracement line of the previous advance. Second, the two arrows show that the middle line corresponds with the price peak hit in October at 1970. In a correction, previous peaks usually act as support. Wednesday's intra-day low in the Nasdaq came within 15 points of that support line. Combine those two support levels with the 200-day moving average, psychological support around 2000, and an oversold condition and you have a logical spot for some bottom-fishing. Needless to say, this is a crucial spot for the Nasdaq market. My guess is it will attempt a rally from here. To gain any traction, however, it has to first clear its 50-day average. The Nasdaq is drawing strength from semiconductors.

Chart 2

SOX INDEX LEADS NASDAQ HIGHER ... The Semiconductor (SOX) Index has a big influence on the direction of the Nasdaq market. That's why this week's SOX rebound is providing some Nasdaq support. Chart 3 shows that the SOX is finding support at its 50 and 200-day moving averages. It's also bouncing off its 50% retracement (middle) line. And its 9-day RSI is turning up from oversold territory at 30. How long and how far the SOX bounce carries will help determine if the Nasdaq bounce has much staying power. Since the Nasdaq has been the weakest part of the market, any kind of rebound should stabilize the rest of the market as well. I'm not sure for how long, but the market is entitled to a bounce from current levels. This week's pullback in oil prices may also give the market a short-term boost.

Chart 3

THE DOW IS ALSO OVERSOLD -- BUT WEEKLY RSI IS NEGATIVE... The Dow Industrials have also reached a short-term oversold condition just above the 200-day moving average. On any rebound, the first level of resistance to watch is the late-February low near 10600. While the short-term RSI readings are oversold, it's important to keep a long-term perspective. The weekly bars in Chart 5 show that the weekly RSI has just broken its early 2005 low after showing a "negative divergence" during February. That argues against expecting too much from a market bounce. Since weekly indicators are more important than daily, the current alignment of the daily and weekly charts suggests to me that any short-term rebound in the market is probably more of a selling than a buying opportunity. In other words, I'd rather sell into rallies than buy into dips.

Chart 4

Chart 5