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Advanced Technical Analysis: SOX

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Note: the following analysis is formulated as an assimilation of Fibonacci, DeMark, Elliott Wave and other technical indicators. It is offered as education and not intended as advice in any way.

We're updating our SOX note from last week (12/14/04). We then suggested based on the educational analysis technical weakness was likely at 433-438 for another impulsive move down to new swing lows (beneath the 12/9 lows) and probably toward the 398 area. So far, that view is proceeding apace. However, the short term action over the next few sessions should prove instructive.

There are three potential Fibonacci targets lower: the most probable is 398, with 412 and 375 acting as less probable targets in the next handful of sessions. The question at this juncture is whether the entire move down from the peaks set on 12/3 is part of a (counter trend) ABC correction that will soon find a low (398 or 412) and then move decidedly higher or is it part of a developing larger impulsive move down toward (eventual) new yearly lows. The longer term technical indicators we use continue to suggest that the more bearish interpretation is the probable one: the corrective looking move up from September's lows, the underperformance of this index relative to both the NDX and the blue chips, as well as the longer term Fibonacci support/resistance targets. All of these support the idea that the SOX's most probable path is toward new annual lows.

However, one of the more useful aspects of Fibonacci / Elliott wave analysis is that the short term patterns must also confirm the longer term ones. Which is to say that if the more bearish pattern is taking place, the short term pattern should be giving us clues toward that end. Specifically then the key to knowing which of these scenarios is afoot lies in the short term. If the move down from the 12/3 peaks is corrective (and new annual highs are coming) then the SOX should find support at either 412 (SMH $31.82) or 398 (SMH $30.70) in the next several sessions and then may rally impulsively higher.

If however the more bearish interpretation is operative then any rallies that may develop should not exceed the recent 437 ($33.62) peaks while the SOX makes its way toward 398 (SMH $30.70) and possibly 375 ($28.90) over the next 2-3 weeks. A move on the SOX below 425-430 (SMH $32.60 - $33.00) suggests further weakness based on our work with a move above the aforementioned 437 ($33.62) levels negating the near term bearish view and forcing us to stand aside.

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