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Will Intel Corporation Lead the Market Lower?


If Intel begins to break down, the probabilities of the market breaking down increase dramatically. Here's why.

Intel (NASDAQ:INTC) reported earnings last night and they were not much to talk about. Although the company hit its earnings forecast, its full year revenue forecast was missed for the quarter and was cut for the year. Imagine that, you can't grow the top line yet you can make the bottom. Hasn't that been the case for most companies for more than a year now?

Shares traded down 4% after hours as a result. Now, if it were just Intel, one could simply overlook the abysmal numbers and move on, but the Nasdaq Composite (INDEXNASDAQ:.IXIC) and the narrower Nasdaq-100 (INDEXNASDAQ:NDX) have been front and center leading this market higher in an uninterrupted fashion for the past few weeks and Intel is a big part of that mix.

What's more alarming is that Intel has a habit of leading the market up or down as a result of its earnings hits and misses. Take a look at the correlation between Intel and the Nasdaq-100 on this five-year monthly chart. Each of the vertical lines represents an earnings announcement. The correlation is indisputable.


One could cite a number of reasonable rationales for this correlation, such as Intel earnings always represent the first big technology company to report each quarter and the fact that Intel remains a technology heavyweight and virtual monopoly still in many respects. When Intel stumbles, a lot of technology companies are affected, from software vendors to equipment suppliers.

Now, although technology isn't as large a part of the S&P 500 (INDEXSP:.INX), the correlation there is remarkably tight as well. Other than the one highlighted region, Intel appears to lead the S&P 500 around almost as well as the Nasdaq-100 as seen below.


Given this background, the question you and I have to ask is, what does this latest earnings report mean to Intel and the market? To try and answer that, take a look at a chart of Intel on the short- and intermediate-term time frames.


On the short-term time frame, Intel was forecasting lower prices the last couple of days as it was completing a full bearish retest and regenerate sequence (testing the top of the prior SPL that was broken) with significantly lighter volume. Given that the test has succeeded, it is now poised to regenerate lower.

The test today and potentially past today will be a test of the lows and the anchored support zone shown on the above chart. That zone is supported by the high volume bars from late April, and if they break, then the short term becomes even more bearish (if that is possible since it is has already twice confirmed a bearish trend -- see the green down-pointed arrows).

On the intermediate term chart, the picture isn't nearly as dire though, and in fact one could derive some optimism from it.


On this time frame, anchored support overlaps the short-term anchored support zone in the $23-$23.50 region. The anchors to this zone have significant volume and will be hard to break. Add that to the fact that the two time frames show anchored support at the same price area and the difficulty of cracking it becomes greater. This, of course, leads to potential optimism if you are bullish since the market is nothing more than a pure testing process. If the test to push lower fails, then one has to expect a reversal test higher to follow.

Although the correlations shown above are not perfect, there is a high degree of correlation. If Intel begins to break down, the probabilities of the market breaking down increase dramatically. Note that the earnings charts shown above are on a monthly (long-term) time frame, so Intel could head lower and the market could hold up initially and then eventually follow. If this past correlation is any guide to the future, it bears watching, and the test of the $23 area becomes reasonably crucial because the next support zone of significance is down in the $21 area or another 10% lower.

(See also: Why Intel's Pain Will Be AMD's Gain)

Twitter: @tatoday
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