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Foot fake!

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We mention the PHLX Semiconductor Index (SOX) quite often on the site. For the vast majority of the time that Minyanville.com has been around, I have focused on the technical side of the market, because quite frankly, the fundamental side has been stagnant. Think about it - the ISM number has been up four months in a row, but it is barely above the all-important 50 level. The reason I bring this to your attention is that absent any new fundamental improvement, any technical improvement can be temporary. That is what happens in the "reality trade" that I believe the market is now in.

The classic example is the SOX Index. Until early October, it was in a very clear downtrend. In late October the chart went from negative to neutral as the Index broke its downtrend. In Early December, it appeared to turn positive as it broke above a well-defined resistance level. The action from early October through early December represented a textbook example of what a bottom should look like. Why then did the move fail miserably? My guess is that it was that the technical improvement wasn't accompanied by fundamental improvement, and the geo-political environment kept the demand (read: buyers) away.

In a bear market, an oversold market can become more oversold until a real intermediate-term washout takes place. In addition, it is important to not act on every chart because it might be bottoming. After so many false starts, a good pattern might not be shorted in case it is an indication that the bear is over, but it should probably not be chased until follow through evidence emerges.

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