SOX Bounces From Turning Point

09/13/04 11:38:34 AM

by Chris Manuell

The semiconductor index (SOX) is a useful barometer for the equity market and it has remained in a steady downtrend for 2004. Recently the market has enjoyed a sharp bounce upward, perhaps signaling a change in the downward trend.

Security: SOX
Position: N/A

Bollinger Bands can provide traders with a tool to monitor extreme movements in market prices. They are plotted at standard deviation levels above and below a moving average. A standard deviation is a gauge of volatility, so the bands act as automatic stabilizers, expanding during volatile markets and contracting during stable periods.

From September 3 to September 8, the SOX completed three consecutive closes outside of the lower Bollinger Band, highlighting the strength of the bears as they continued to force the market lower. The bears were unable to sustain the weakness with a strong white candle emerging on September 9th. RSI also alerted the traders to an overextended market when it touched an oversold reading.

Bollinger Bands also provide potential price targets. A move that originates at one band tends to gravitate towards the opposite band. The SOX heightened its chance of a move to the upper band in the 400 region when it successfully breached the 20-day MA, or middle band. This had capped prior bounces, as two attempts to close above the middle band in August attest.

Savvy traders may have decided to book profits after examining the longer-term chart and discovering a major turning point zone in the 350 region. The SOX has turned from that level on numerous occasions over the last three years. This area also the .618 Fibonacci retracament level of the Oct 2002 to Jan 2004 rally.

Figure 2: Weekly chart of the SOX.

The weekly ADX is also placed at an intriguing level. The 2002 decline and 2004 rally were both halted when the ADX tapered off around 33. The weekly ADX on the SOX is currently trading at 33.2. Technical analysts are fond of three's. Will this third attempt at 33 on the ADX also mark the end of a trend?

Chris Manuell

Chris Manuell spent 7 years as a futures sales/trader for a large investment bank and more recently as a technical analyst for an independent research company. He has a bachelor of economics and graduate diploma in applied finance & investment. Currently enrolled in the CMT program with the MTA.