NASDAQ COMPOSITE CLOSES UNDER 200-DAY AVERAGE -- SELLING IN BIOTECHS, INTERNET, AND SEMICONDUCTORS WEAKENS MARKET

BIOTECH AND INTERNET INDEXES BREAK 50-DAY LINES... Two former leadership groups in the Nasdaq market have undergone short-term trend damage. Chart 1 shows the Biotechnology Index (BTK) trading beneath its 50-day average for the last four trading days. Its relative strength line (versus the Nasdaq) is starting to slip as well. Biotechs had helped support the Nasdaq both on an absolute and relative basis since June. Internet stocks have also been Nasdaq leaders as shown by the rising relative strength line (vs. the Nasdaq) in Chart 2. Today's selling, however, pushed the Internet Index below its 50-day line for the first time since August. The worst recent performance has come from semiconductor stocks.

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SEMICONDUCTOR STOCKS ARE IN JEOPARDY ... The Semiconductor (SOX) Index was one of the day's biggest losers. Its daily chart shows the SOX falling below its December/March highs which is a negative sign. The SOX is bearing down on its 200-day moving average. The relative strength line beneath chart is a ratio of the SOX divided by the Nasdaq Composite Index. The ratio line shows that the SOX has been a leader in the Nasdaq market all year. Today's downturn (yellow circle), however, has put the 2005 up trendline in jeopardy. Chart 4 shows the week's drop in the Semiconductor Holders (SMH) accompanied by rising volume. That's a bad combination. The SMH ended right on its 200-day line. The SMH:S&P ratio has turned down. The market and the Nasdaq can't afford to lose chip leadership. Selling in the three groups mentioned above contributed to today's Nasdaq close below its 200-day average.

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NASDAQ CLOSES BELOW 200-DAY AVERAGE ... Prior to today, the only major stock index trading beneath its 200-day average was the S&P 500. It was joined today by the Nasdaq Composite. The volume pattern is also negative. A glance at the red bars beneath the price chart shows rising volume on down days -- including today. That's a bearish combination. The Nasdaq wasn't the only other index to close beneath that long-term support line. Charts 6 and 7 show the Russell 2000 Small Cap and the Wilshire 5000 Indexes doing the same. Over the weekend, I wrote that several market indexes were on weekly sell signals and that a close beneath 200-day averages would be short-term confirmation of the deterioration in the long-term market trend. Today's selling has only made a bad situation worse.

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