NASDAQ NEARS TEST OF 2006 HIGH -- MICROSOFT BREAKOUT GIVES LEADING SOFTWARE GROUP ANOTHER BOOST -- SEMICONDUCTOR HOLDERS EXCEED 200-DAY LINE

NASDAQ NEARS ITS SPRING HIGH ... It seems like the market has to prove itself every time a major stock index approaches a previous peak. With all of the attention being given to upside breakouts in the Dow and the S&P 500, it shouldn't go unnoticed that the Nasdaq market is approaching an important test of its own. The weekly bars in Chart 1 show the Nasdaq Composite Index nearing a test of its spring high at 2378. A close through that previous high would put the tech-dominated market at a new five-year high. The resolution of that test will also help determine if the overall market is in need of a rest (if the Nasdaq stalls there) or continues its strong advance (if the Nasdaq breaks out). One of the Nasdaq's strongest groups has been software.

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MICROSOFT BREAKOUT BOOSTS SOFTWARE ETF ... Chart 2 shows the Software Holders (SWH) continuing to set new highs after achieving a bullish breakout a month ago. It's still leading the Nasdaq higher. The software group got a big boost from Microsoft today. The weekly bars in Chart 3 show the stock breaking through its 2006 high. That also confirms that larger tech stocks are assuming a new leadership role.

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SEMICONDUCTOR HOLDERS EXCEED 200-DAY LINE ... The semiconductor group has been a market laggard all year. It's also been the weakest part of a reviving technology sector. This week's strong price and volume action suggest, however, that the group may finally be benefiting from new signs of technology leadership. The daily bars in Chart 5 show the Semiconductor Holders (SMH) closing above their 200-day moving average for the first time in five months. This week's upside volume is also encouraging. If the Nasdaq is able to break through its 2006 high, it's hard to imagine that an important technology group like the semiconductors won't benefit accordingly.

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