SOX NEARS BULLISH BREAKOUT -- MARKET SHRUGS OFF OIL BOUNCE -- WHEN BEING OVERBOUGHT MAY NOT MEAN MUCH
SEMICONDUCTOR INDEX TESTING 2005 HIGHS ... After some hesitation earlier this morning owing to a jump in energy prices, the market moved into new ground this afternoon to resume its uptrend. A lot of the credit for the afternoon strength comes from the semiconductor group which was second only to energy stocks today in terms of relative strength. As a result of today's chip buying, the Semiconductor (SOX) is now challenging the previous highs hit during August and September. The relative strength ratio below the chart shows that the SOX had been a market laggard since August. Since the start of November, the SOX relative strength line has been rising. That's a good sign for the technology sector and the market as a whole. Chart 2 shows how important an upside breakout from these levels would be. That's because a decisive close over 485 would put the SOX at the highest level since the summer of 2004 and would go a long ways to repairing the technical damage done since the start of 2004 when the Nasdaq started dropping. The relative strength line in Chart 2 also carries a positive message. Throughout most of 2004, the SOX was a drag on the rest of the market. Its relative strength line had been flat throughout most of 2005, but is starting to climb again.
Chart 1
Chart 2
INTEL GAINS MORE THAN 3%... Although Intel is well off its summer highs, its 3.6% gain today had a big influence on the SOX rally. [Intel was the biggest percentage gainer in the Dow]. Its daily bar chart shows Intel climbing over 26 for the first time in three months. Its green volume bars also reflect some fairly heavy buying over the last week. The Intel/SPX ratio also paints an interesting picture. Intel was a drag on the S&P 500 from early August to early November. Since the start November, however, Intel has actually been doing better than the market. Because of its size, Intel carries a lot of weight in the SOX Index and the market as a whole. It's good to see it exerting some leadership for a change.
Chart 3
KLA-TENCOR HITS NEW 52-WEEK HIGH ... One of the SOX leaders that did breakout to a new 52-week high today was KLA Tencor. The stock closed over 52 for the first time in more than a year. The weekly bars in Chart 5 show that KLAC has a chance of eventually reaching its early 2004 peak. Its relative strength ratio is rising as well which also makes it a potential market leader.
Chart 4
Chart 5
WHEN OVERBOUGHT MAY NOT MEAN MUCH ... You've no doubt heard here and elsewhere that the market is in a short-term overbought condition. And it is. Chart 1 shows the 9-day RSI oscillator trading over 70. Yet it keeps rising. That fact caused me to revisit one of our technical indicators that helps us measure when a market is at or near a market top. The indicator is the Average Directional (ADX) line. It's the black line plotted under the price bars. A rising ADX line tells us that the market is trending and that it will keep trending until the ADX line peaks. The green (+DI) and the red (-DI) lines tell us the direction of the trend. Since the green line (buying pressure) is over the red line (selling pressure), the market's trend is up. Normally, the ADX line will keep rising until it moves above the upper line (whether that line is red or green). That happened at market turns in May, August, and October. [When the red line is the upper line, an ADX peak will identify a bottom; when the green line is the upper line, an ADX drop will signal a peak]. The ADX line is at a relatively low level of 28 and is well below the upper green line. That suggests that the market has further to run despite its overbought condition.
Chart 6
FED MINUTES BOOST MARKET... The market got a late boost from the November Fed minutes which suggested the Fed might be nearing the end of its rate hikes. That also caused bond yields to drop and the dollar along with them. The dollar is currently testing an important resistance barrier. We'll take a look at it tomorrow. What the dollar does from here may also have some bearing on gold which is nearing the $500 level, and commodity markets which are starting to rise again. Please see this morning's message which showed crude oil and the CRB index bouncing off their 200-day averages. Chart 7 shows the Oil Service Index closing at a new all-time high. That's certainly hinting at higher oil prices. If commodity prices start to rise again, the Fed may be claiming victory over inflation a little too soon.
Chart 7
