|I often focus on sector rotation as a basis for anticipating market action. The good 'ol days of buy & hold investing or trading are gone and possibly not coming back for a long time.|
|The ability to get ahead of "hot money" and more importantly out with a profit is tantamount to success in this decade and the New Market paradigm that we've begun.|
|Figure 1: Weekly Chart: SOX|
|Graphic provided by: Quote.com.|
|Graphic provided by: QCharts.|
|This picture of the Philadelphia Semi-Conductor Index shows price action recently rejected at multiple points of resistance. Both 50- and 200-week moving averages held containment up near the historical upper channel line. Next stop might be the 450 area, below where mid-line value (black) lies in wait. Stochastic values are once again turning bearish reversals and lower price action can be expected in the week ahead.|
Figure 2: Weekly Chart: BTK
But that's not necessarily true for all tech sectors across the board! The Biotech Index has bounced within a neutral wedge for most of the past two years and counting. Recent failure at resistance sends it back toward the 500 area where congestion and the center of this long term pattern lie.
Stochastic values have progressed much further towards an oversold extreme than the SOX, which would suggest the BTK is closer to a near-term bottom on a relative basis. Secondly, money often leaves biotechs to chase chips, hardware and related sectors when a bullish reversal has been underway. The opposite is true when fear of a decline sends capital parked into the BTK for relative safety as tech sectors with quantified earnings valuation languish.
If the market has begun another cycle lower in the trend, we might expect to see the SOX fall further than the BTK and last longer. Keeping an eye on the relative basis is critical for picking plays that perform and identifying where in a trend's lifespan we seem to be.
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