S&P 500 AND RUSSELL 2000 BOUNCE OFF SUPPORT -- NASDAQ SHOWS RELATIVE STRENGTH -- SEMIS LEAD TECHS HIGHER -- MXIM AND AMAT POWER THE SEMIS -- BIOGEN JOINS BUYBACK FEVER -- USING PRICE CHANNELS
TESTING KEY SUPPORT AHEAD OF THE FED... Today's Market Message was written by Arthur Hill. John Murphy will be back tomorrow. - Editor
The Fed started its two day meeting today and an announcement is expected tomorrow afternoon. Stocks were weak leading up to the meeting, but managed to firm today and key support levels are holding for the S&P 500 and Russell 2000. The Russell 2000 broke below its 50-day earlier this week, but recovered with a strong move back above this key average today. The index has now bounced off support at 820 three times in the last six weeks. Today's bounce is pretty impressive and the bulls have the edge as long as this key support level holds.
Chart 1
The S&P 500 also broke its 50-day moving average this week, but rebounded to reinforce support around the early June low. With today's rebound, the S&P 500 closed right near its 50-day and the bulls are showing some resilience. The June lows combine to mark a support zone around 1480-1490 and the bulls have a clear edge as long as this level holds. Like the Russell 2000, the S&P 500 is still close to key support and the market's reaction to the Fed announcement will either make or break this support zone.
Chart 2
NASDAQ SHOWS LEADERSHIP... While both the Russell 2000 and S&P 500 tested support from their early June lows, the Nasdaq held well above its early June lows and showed relative strength this week. In addition, the index held above the 50-day moving average on Monday and Tuesday. There was a brief dip below the 50-day on the open today, but the Nasdaq recovered nicely and closed above 2600. In fact, the Nasdaq formed a bullish engulfing pattern today and recovered the losses of the last two days. Techs continue to show leadership and the bulls are in good shape as long as the early June lows hold.
Chart 3
SEMIS BUOY TECH STOCKS... Semiconductor stocks were strong on Wednesday and this kept the Nasdaq buoyant throughout the day. The Semiconductor HOLDRS (SMH) surged back above 38 with good volume and semis are one of the strongest tech groups this year. Chart 4 shows the year-to-date performance for four key tech ETFs and QQQQ. The Semiconductor HOLDRS (SMH) and Internet HOLDRS (HHH) are both up over 15% this year. These two are the clear leaders and QQQQ is up just over 10% on the year. The Networking iShares (IGN) are lagging QQQQ with a year-to-date gain around 9% and the Software HOLDRS (SWH) is up less than 3% on the year. Semis are the place to be.
Chart 4
On the price chart, the Semiconductor HOLDRS (SMH) broke resistance in April and broken resistance turned into support. A falling flag formed at the end of May and the ETF found support around 35.5-36. The uptrend resumed with the June surge and the next resistance level is the January 2006 high around 40. After that, the next resistance level is the January 2005 high around 45.
Chart 5
MXIM AND AMAT CHALLENGE RESISTANCE... Maxim Integrated Products (MXIM) and Applied Materials (AMAT) were two of the semiconductor leaders today. MXIM surged over 2% and AMAT was up over 3%. On Chart 6, you can see that MXIM has been challenging resistance just below 34 the whole year and upside volume has been quite strong since April. The stock actually hit a new 52-week high last week, but pulled back on some profit taking. The stock continues to show strength and an upside breakout looks inevitable. On Chart 7, an inverse head-and-shoulders pattern is taking shape this year and a break above neckline resistance at 34 would be most bullish.
Chart 6
Chart 7
Applied Materials broke resistance with a surge in mid May, but fell back quite sharply with a gap down two days later. It was a gut-wrenching pullback, but the bulls did not give up and the stock broke back above resistance in June. AMAT is now showing good Relative Strength and leading the market. On Chart 9, AMAT has been moving higher since July and is currently challenging its January 2006 highs. The stock broke above its 40-week moving average (200-day) and this offered support throughout 2007. AMAT bounced off the 40-week earlier this month and now looks poised for a break to new highs.
Chart 8
Chart 9
BIOGEN JUMPS ON BUYBACK... Everyday is seems like some company is either going private or using cash to buy back shares. The end result is fewer shares (supply) in the stock market and this is helping the bulls (demand). Biogen (BIIB) announced the results of a modified Dutch auction for its share buyback. The company is set to buy back over 16% of its outstanding shares and this boosted the stock today. BIIB surged in April and May with big gaps on big volume. After a rest in June, the stock is back at it again with another surge to new highs on even bigger volume.
Chart 10
USING PRICE CHANNELS FOR TREND ASSESSMENT... The 20-day Price Channel indicator is composed to two bands. The upper band represents the highest close for the last 20-days and the lower band represents the lowest close for the last 20-days. The Price Channel rises as closing prices work their way higher and falls as closing prices work their way lower. A security shows strength when it records a 20-day high and thus breaks the upper band of the price channel. Conversely, a security shows weakness when it records a 20-day low and breaks the lower band of the price channel. As with all indicators, the 20-day Price Channel is not perfect and will have its share of whipsaws. However, it can be quite helpful when used in conjunction with other indicators.
On the chart below, the red line shows the closing prices for Nasdaq and the 20-day Price Channel. Notice how the index touched the upper band numerous times during the strong uptrend from August to February. The Nasdaq never even came close to the lower band until late December. The February-March decline broke below the lower band, but this signal proved to be a whipsaw and the bulls were back in business with the April surge. Once again, the index has touched the upper band numerous times and this shows strength in the trend. Look for a move below 2530 to break the lower band and signal trouble.
Chart 11
