SEMICONDUCTORS BACK OFF FROM RESISTANCE -- FALLING SOX PULLS NASDAQ AND REST OF MARKET LOWER

SELLING INTEL ON THE NEWS ... Yesterday I showed the S&P 400 Mid Cap Index testing its 2005 high, and suggested that it held an important key to short-term market direction. The same is true for the semiconductor group. A positive mid-quarter report from Intel last evening was greeted by selling. In fact, Intel is the biggest drag on the Dow today while the semiconductors are the day's weakest group. That's weighing on the technology sector and the market in general. A lot of that is based on technical considerations. Chart 1 shows the Semiconductor (SOX) Index trading just shy of its March high. Its 9-day RSI line is starting to weaken from overbought territory over 70. The SOX/SPX relative strength ratio below the price chart is also starting to back off from its early March peak. That's why the current state of the SOX is important to market direction. It's been primarily responsible for the recent runup in the Nasdaq market which has been positive for the rest of the market. With both the SOX backing off from its March high near 445 and the the Nasdaq from resistance at the the 2100 level, the rest of the market is stalling as well.

Chart 1

Chart 2

SEMICONDUCTOR HOLDERS FALL BACK UNDER RESISTANCE BARRIERS... Chart 2 makes the case for the chip group backing off from major resistance even clearer. It shows the Semiconductor Holders (SMH) trading back below the previous peaks hit in March and last December. Buying earlier in the week in Intel and Texas Instruments pushed the SMH briefly through those chart barriers. Since Friday is the most important day of the week, a lower close today would have to be viewed as at least a temporary failure by the chip ETF. [The weekly bars will show a downside weekly reversal]. The line below Chart 2 shows Bollinger Band Width turning down for the first time since early March when the SMH also peaked. As I've explained recently, downturns in Bollinger band width are usually a sign of a short-term market peak. That confirms a similar downturn in band width earlier in the week in the Nasdaq market which backed off from its spring high near 2100.