SEMIS WEIGH ON THE NASDAQ -- RELATIVE WEAKNESS IN FINANCIALS AND CONSUMER DISCRETIONARY CONTINUES -- BULLISH PERCENTS DIP BELOW 50% - DOWNSIDE TARGETS FOR THE DOW -- USING THE MEASURED MOVE

SEMIS DRAG NASDAQ LOWER... Today's Market Message was written by Arthur Hill. John Murphy will return tomorrow. - Editor

The Nasdaq dropped over 1% on Wednesday with weakness in the semis. Chart 1 shows the Nasdaq breaking back below the 50-day moving average with a gap down today. The index failed at the 200-day moving average in mid May and early June. With a sharp decline in mid June, the Nasdaq broke the May lows and the 50-day moving average. This was the key support break. The bulls did not go quietly as the Nasdaq bounced back above 2450 early this week. However, this bounce did not last long as the index broke back below the 50-day moving average today.

Chart 1

Chart 2 shows the Semiconductor PowerShares (PSI) gapping down and closing in a support zone on Wednesday. Support around 16.5-17 stems from the 50-day moving average, the 200-day moving average and the January trend line. Wednesday's gap is negative, but PSI still shows relative strength and is currently trading near support. This is an important test for an important group. A breakdown in the semis would further weigh on techs and the rest of the market.

Chart 2

CONSUMER DISCRETIONARY SECTOR HANGS HEAVY... The Dow dropped over 100 points with weakness from the consumer discretionary and financial sectors. Relative weakness in these two sectors remains a dominant theme in the market. While it may seem monotonous, the stock market will remain under pressure as long as these two show relative weakness. The consumer discretionary sector represents key industries like retail, home building, restaurants, hotels, auto manufacturing and media. The financial sector represents the banks, brokers and REITs. Together, these are perhaps the two most important sectors in the market. Confidence is riding high when these two sectors lead. Confidence is low when these two lag. The PerfChart below shows the performance of the nine sector SPDRs since April 30th. The Consumer Discretionary SPDR (XLY), Industrials SPDR (XLI) and Financials SPDR (XLF) are the worst performing sectors. All three are down more than the S&P 500 (red bar). The Utilities SPDR (XLU) is the only sector to show a gain since April 30.

Chart 3

Chart 4

Chart 5

BULLISH PERCENTS DIP BELOW 50 ... The table below comes from the Market Summary page. Bullish Percent Indices show the percentage of stocks on Point & Figure buy signals. If 45 stocks in the Nasdaq 100 are on Point & Figure buy signals, then the Bullish Percent Index would be 45% (45/100). In general, the market rises when more stocks are on buy signals (greater than 50%). The Bullish Percent Indices for all the major indices are now below 50%. With less than 50% of the stocks in these indices on buy signals, the bulls are going to have a tough time moving the market higher. We can also get an idea of the strongest and weakest indices with these levels. The Dow is clearly one of the weakest with a 33.33% reading, while the NYSE Composite is holding up the best with a 48.55% reading. Underneath the major indices, we can see the Bullish Percent Indices for the sectors. These numbers confirm what we are seeing on the Sector PerfChart. The consumer discretionary, industrial and financial sectors are the weakest.

Chart 6

DOWNSIDE TARGETS FOR THE DOW... It should be clear by now that John Murphy and I consider this a bear market. Furthermore, with the decline in the S&P 500 and Dow over the last five weeks, it looks like another leg down is under way. According to Dow Theory, neither the length nor the duration of a trend can be determined. Quite simply, the trend is in place until proven otherwise. Even though it is dangerous to make predictions, I will go out on a limb today with some downside targets for the Dow. The next three charts detail three different techniques to forecast a downside target. Chart 7 uses the retracement indicator. The Dow advanced from March 2003 until October 2008 with an advance that almost doubled the Average. A 50-62% retracement of this big advance would carry the Dow back to the 10,000-10,800 area (yellow).

Chart 7

Chart 8 shows the entire advance as well and highlights the 2004-2005 consolidation. For two years, the Dow traded between 9,700 and 11,000. The 2006 break above 11,000 triggered a big rally that exceeded 14,000 in July 2007. The consolidation zone now becomes a support zone that can also act as a target zone for a decline.

Chart 8

Chart 9 uses a Measured Move technique to project both the length and the duration of the decline. Yes, this is a doubly daring projection. In Technical Analysis of the Financial Markets, John Murphy notes that the rationale behind the measured move is similar to the rationale behind flags and pennants. These patterns form at the midpoint and represent the halfway point of an entire move. In this example, the Dow declined sharply with a big move below 12,000 and the corrective advance carried the Dow back above 13,000 in May. I used the March low because the March closing low was lower than the January closing low. With a decline over the last five weeks, a reaction high formed in May and it looks like another leg lower has started. Based on the Measured Move technique, we would expect this second leg down to be roughly equal to the first. In addition, the slope of the move would also be equal to the first. As such, the dotted lines denoting these moves are parallel. The second move ends around 10,900 on 20 Oct. Hmm... a bottom in October. Where have I seen that before? Take these downside projections with a grain of salt. Trend identification is the main ingredient here. As long as the trend is down and the bulk of the evidence is bearish, the downside projections remain valid.

Chart 9