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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.

Summary


Despite the 3 day 13.6% blast in the semiconductor names, it is important to realize that, given the technical damage done over the last 8 months in this sector, there is very little technical reason to get bullish on the semis here on anything other than a short term basis. The major trend down from the Q1:04 peaks remains bearish (a fact largely confirmed by the overlap in prices recently with the peak in December 2002) and is still targeting levels below the 2002 lows in time.

However, the intermediate (multi-week) term indicators are suggesting two possibilities for this sector over the next few weeks: (1) the peak on 9/13 ended a complex corrective bounce from the 8/13 lows and the larger degree bearish trend is now reasserting itself with a move to new annual lows or (2) Fibonacci targets in the 420-440 level will be targeted in the next few weeks in a struggling, overlapping fashion before the dominant bear trend re-establishes itself. Any correction of the impulsive move off the 9/8 lows in the next few sessions will need to hold Fibonacci support in the 369- 380 range to increase confidence that the 420-440 area will eventually be seen.

Our original analysis on July 1st suggested that "if the 410-415 area does not substantially hold prices, then the more bearish interpretation of the price action off the January peaks would become operative, suggesting at a minimum that the 340-360 area would be the next Fibonacci target." The September 8th low was 350.91. Interestingly too, our last SOX update note [8/10] suggested that "we had expected [in late July] the SOX to relieve the oversold condition of the daily and hourly charts with a move toward 430-450, our long standing resistance targets, off of the lows set on 7/28 before we could get another good downturn." Why interesting? Because Fibonacci targets for a bounce from the 9/8 lows potentially "project" to the 420-440 area, which is remarkably similar to the important resistance area we identified back in late July of 430-450.

As the analysis above suggests then, if the SOX holds the 370-380 area in the next few sessions, a move to the 420-440 area is the next most likely target for the SOX in this mean-reverting, oversold bounce. Given how oversold the stocks are and how relatively "crowded" the short side in these names has been, we think it's prudent to give the SOX room to run to our 420-440 area, which we think is the most probable scenario over the next few weeks. We will then look to identify topping indicators on the hourly and daily chart to determine if that cited Fibonacci resistance area will be a corrective bounce peak for this index. If so, we will provide analysis for a downtrend scenario. If prices come substantially below 370 in the next few sessions however, that would argue that the larger degree bearish trend is back in force and the SOX is headed for new annual lows and eventually the 2003 and 2002 lows and below.

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No positions in stocks mentioned.

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