CHIPS LEAD MARKET AS SMH BOUNCES OFF 50-DAY LINE -- TRANSPORTS LEAD DOW COMPLEX HIGHER -- JAPAN AND GOLD RECOVER -- HOW TO USE PARABOLIC STOPS ON GOLD

SOX CLIMBS 3.4% AND BOOSTS SMH ... Last evening I suggested that the ability of the Semiconductor (SOX) Index to end in positive territory after early selling was a positive sign. That positive tone has carried into today's trading in a big way. Thanks to good news from Advanced Micro Devices (AMD) and upturns in several other chip stocks, the SOX is up over 3% today and is helping to lead the market higher. Chart 1 shows the SOX nearing a test of last week's high. Which brings us back to the Semiconductor Holders (SMH). I wrote yesterday that the SMH was driven lower mainly by its heavy weighting in Intel which had lost 12% on the day. I also suggested that it needed to find support at its 50-day average if its uptrend was to be maintained. Chart 2 shows the SMH gapping higher today and bouncing off that 50-day line. Yesterday's heavy downside volume is still of some concern and I'd like to see more impressive upside volume. But the 50-day line has held and that's an encouraging sign. Today's impressive rally in the chip group is boosting the technology sector and the rest of the market. It's also helping to stabilize global markets. That's especially true of Asia where technology weakness earlier in the week caused profit-taking. Even in Japan, the 50-day line was tested and is holding.

Chart 1

Chart 2

JAPAN INDEX BOUNCES OFF 50-DAY LINE ... After two days of heavy selling (and losses of 6%), the Japanese market is rebounding today. The Nikkei 225 gained 2.3% (+355) in overnight trading to lead today's global bounce. Chart 3 shows the NIKK bouncing off its 50-day moving average. During downside corrections, it's important the market stay over that line. A close below the 50-day line (especially for several days) is usually an important sell signal. An ongoing uptrend should bounce off that line. Chart 4 is a yearlong chart of the Nikkei and shows how well the 50-day average has worked. An initial buy signal was given last June when the Nikkei climbed back over the line (green arrow). Since then, the line has been tested and held three times -- last August, last October, and this week (see blue arrows). There's no guarantee that it will stay over that line. But, as long as it does, its uptrend will remain intact. Japanese iShares (EWJ) are bouncing off their 50-day line as well.

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DOW TRANSPORTS LEAD COMPLEX HIGHER ... A big jump in the transportation group is leading the Dow complex higher today. Most of the gains are coming from rail stocks like CSX, GATX, and Union Pacific. Today's bounce puts the Dow Transports back over their 50-day line. That may be helping the Dow Industrials hold that support line as well. The Dow is being led higher by Disney, Pfizer, and Hewlett Packard. Which brings us to the utilities. Lately, they've been the strongest of the three Dow averages. Chart 7 shows the Dow Utilities nearing a three-month high. Some of that may be due to their defensive qualities and continuing low bond yields. I suspect, however, that part of the utility buying is also linked to the recent rise in energy shares. That's because there's also an energy component in the utility universe. The good news is that all three Dow averages are moving higher and have survived tests of their moving average lines.

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GOLD IS ALSO BOUNCING BACK ... The gold market is climbing $10 today and has regained most of the selling that took place yesterday. I've gotten a lot of questions recently about whether it was time to take partial profits after such a long run. I suggested yesterday that it might indeed be time to do so. I thought I'd elaborate on some ideas on how to take "partial" profits in an increasingly overbought market. There are several approaches to take. One is to sell into strength. [We're talking here about selling only a "trading" portion of one's holdings to lock up some profits. Holding onto a "core" position is still recommended]. Chart 8 shows three versions of Bollinger bands applied to Gold Trust Shares (GLD). The %B line on the top of the chart shows the bands as an oscillator. Readings over 1.00 put the price of GLD over their upper band. That's usually followed by some profit-taking. Anyone looking to do a little selling on strength could do so when the price touches or moves above the upper band (or the 1.00 level). The line below the chart measures band width. When prices are rising, band width also rises (as the bands expand). Market pullbacks are usually associated with contracting bands which occur when band width narrows. At the moment, it looks like the band width may be peaking which would suggest that prices are overbought. Another approach is to sell when short-term support levels are broken.

Chart 8

USING PARABOLIC SARS ... When a market like gold is trading far above its 20 or 50-day moving average lines, those lines aren't helpful in determining tightly placed stopout points. Fortunately, there's a more sensitive (but lesser known) trend-following indicator called Parabolic Stop and Reverse (SAR) points. The dots in Chart 9 show what they look like. A short-term sell signal is given when the lower stop is hit (see red arrow). When prices are falling (December 12 to 27), the dots are buy stops placed over the market. A buy signal is generated with the upper stop is hit (green arrow). Dots below a rising market represent stopout points. As the chart shows, GLD has been on an SAR buy signal for the last fifteen trading days. Since there's an acceleration factor built into the SARs, they hug the price action pretty closely. The last SAR is currently at 53.60. The SAR did a nice job of spotting the price dip that took place during the second half of December that warranted some short-term profit-taking. The beauty of the indicator is that it gets a trader out pretty close to a top, and then gets the trader back in again. It's meant to be used mainly for short-term trading purposes. There's one caveat. The literal meaning of the SAR is "stop and reverse". While the SAR can be used for stopping out over-extended positions, I don't recommend "reversing" to the short side. I'd simply move to the sidelines to await the next buy signal. [A more in-depth explanation of the Parabolic SAR can be found in the Stockcharts Chart School].

Chart 9