TECHNOLOGY AND CONSUMER DISCRETIONARY LEAD REBOUND - SEMICONDUCTOR ETF GETS OVERSOLD BOUNCE - NETWORKING ETF RECOVERS AFTER SUPPORT BREAK - QUALCOM AND CISCO LEAD NETWORKERS - SHANGHAI COMPOSITE RISING WITHIN WEDGE - KOSPI SHOWS RELATIVE WEAKNESS

ECONOMIC REPORTS STOKE THE BULLS... Video Link (click here)
Selling pressure hit after the Feds policy statement yesterday, but the bulls were back in business on Thursday. It appears that a drop in initial jobless claims and a sharp increase in productivity sparked the bulls. Jobless claims decreased by 20,000 to 512,000. Productivity surged as output rose and unit labor costs fell. Obviously, the combination of lower employment costs and increased output is bullish for business. In afternoon trading, all nine sectors were up with seven up more than 1%. Technology, consumer discretionary and industrials were leading the charge. With sizable bounces today, support from the October lows is holding across the board. Chart 1 shows the Nasdaq 100 ETF (QQQQ) bouncing off support over the last four days. Even though gains over the prior three days were muted, todays bounce above 42 reinforces support from the October-November lows. More importantly, this bounce staves off a support break that would have reversed the medium-term uptrend.

Chart 1

Chart 2 shows the Consumer Discretionary SPDR (XLY) bouncing off support from its early October low this week. The ETF is up four days in a row. Todays move above 27.5 reinforces support around 26.5. More importantly, it also keeps the medium-term uptrend alive. The bottom indicator window shows the S&P 500 (red) with XLY (blue). Notice how closely these two track. They move step-for-step. Suffice to say that the consumer discretionary is the single most important sector in the S&P 500. As consumer discretionary goes, so goes the market. The consumer discretionary sector consists of retailers, restaurants, automakers, cable companies, hoteliers and other consumer oriented businesses.

Chart 2

SMH GETS OVERSOLD BOUNCE... The Semiconductors HOLDRS (SMH) bounced back above 24 to keep the support zone alive. Chart 3 shows SMH breaking below its August-October lows on Tuesday, but rebounding on Wednesday and Thursday. It is a wild pattern at work with a higher high in mid October and now a lower low in early November. Perhaps the decline below 24 was an overshoot. While I can make the argument for a support zone around 24 (yellow area), the 3-4 week trend remains down. After the break below the October lows, I just consider it an oversold bounce at this point. Follow through with a close above 25 is needed to suggest something more.

Chart 3

CISCO AND QUALCOMM POWER NETWORKING ETF... After breaking below its October low last week, the Networking iShares (IGN) recovered with a bounce back above 25.5 this week. Chart 4 shows IGN becoming oversold last week, forming a spinning top on Monday, a bullish engulfing on Tuesday and opening strong on Wednesday. The spinning top signaled indecision, while the bullish engulfing showed strong buying pressure with a weak open and strong close. With follow through today, short-term price action is encouraging and I would mark first support at Wednesdays low. A move below 25.4 would signal a short-term failure and put medium-term support in jeopardy.

Chart 4

QUALCOMM GAPS THROUGH RESISTANCE... Chart 5 shows QualComm (QCOM) breaking resistance with a gap and surge on good volume. The pattern since mid October looks like a small inverse head-and-shoulders, which is outlined on the line chart in the indicator window. This breakout is bullish as long as it holds. A move back below 42 would negate the breakout and call for a reassessment. The bottom indicator window shows QCOM with the S&P 500 (red). Notice that QCOM lagged from August to October. This is changing as QCOM shows relative strength the last few weeks.

Chart 5

CISCO SURGES OFF SUPPORT WITH GOOD VOLUME... Chart 6 shows Cisco (CSCO) surging off support after a positive reaction to todays earnings report. Broken resistance around 22.5 turned into support from late September until early November. After a decline in late October, the stock firmed at support with two indecisive candlesticks on Monday-Tuesday. CSCO gapped up and closed positive on good volume Wednesday. The stock followed this up with another surge on good volume Thursday. Support has held and the medium-term uptrend remains in place.

Chart 6

CHINA CONTINUES TO RISE... The Shanghai Composite ($SSEC) is lagging the S&P 500, but has yet to reverse its two month uptrend. Because Chinese stocks represent the riskier end of the market, China can be viewed as a leading indicator, similar to techs and small-caps. The Shanghai Composite bottomed ahead of the S&P 500 earlier this year and peaked ahead of the S&P 500 over the last few months. Chart 7 shows the index peaking in August with a sharp decline below 2700. The index has since rebounded with a rising wedge that retraced 62% of the prior decline. Even though the pattern and the retracement are typical for bear market rallies, the trend is up as long as the wedge rises. Look for a move below support at 2900 to reverse this uptrend and foreshadow trouble. Chart note: There is a seven day price gap in early October because the Autumn holiday in China. Maybe we should take a cue from the Chinese and take similar breaks.

Chart 7

KOSPI CORRECTS... While the Shanghai Composite is rebounding, the South Korean Seoul Composite ($KOSPI) is correcting. Chart 8 shows the KOSPI peaking in late September and working its way lower within a falling channel the last six weeks. This pattern could turn out to be simply a correction within a bigger uptrend, but the trend is down as long as the channel falls. Look for a break above 1650 to break channel resistance. The bottom window shows the KOSPI (blue) and the S&P 500 (red). Relative to the S&P 500, the KOSPI is underperforming since late September. This is also a negative for the world stock markets. Going back to late February, notice that the KOSPI bottomed a week ahead of the S&P 500.

Chart 8