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Chips Lead The Way

01/11/02 12:04:48 PM
by Austin Passamonte

Watching certain sectors within a broader index can prove useful. Could a recent rally in the Semiconductor sector be a sign of good things to come for the Nasdaq?

Security:   SOX, NDX
Position:   N/A

For most retail traders, Nasdaq index remains THE market to trade. With that in mind, where can we look for guidance higher or lower in the days and weeks ahead?

Since the birth of tech's last bull run in the late 1990s to its end in the spring of 2000, the Semiconductor Sector Index [SOX] has led Nasdaq indexes higher and lower all the way. This relationship has since shared the limelight with Internet, networking and biotech sectors but still remains the premier sector leader.

Figure 1: Daily Chart: SOX
Graphic provided by:
Graphic provided by: QCharts.
The chart above may have too many lines of study to be instantly legible, but let's pick it apart and identify the important zones. Two big up-sessions powered price action above both the 200-DMA and long-term resistance dating back to mid-May 2001. Price action rests perfectly on the mid-line value of its ascending channel and the resistance trendline that now offers support. Stochastic values are rising but no signs of weakness yet.

Figure 2: Daily Chart: NDX

We looked at the SOX first for a reason: it's leading the NDX right now as always. Note how the NDX managed to break above its 200-DMA but closed below the exact same measure of resistance from last May. This shows us the SOX is stronger on a relative basis than its major index right now. We might also expect the SOX to lead NDX higher and can play the upside in QQQs if/when semis remain bullish. A weak close on Wednesday, January second, coupled with extended moves from the afternoon of January 4th, suggest a bit of pullback to the previously noted support should be expected next.

Traders playing the SOX index itself may choose to use call or put options on the SOX and also SMH Semi-Conductor HOLDRs listed on the AMEX. These basket shares somewhat mirror the SOX and list very liquid equity options to trade in different ways as well.

Without question the NDX has numerous layers of overhead resistance, including the channel continuation it recently fell from. It will take all other major sectors climbing in unison to breach overhead resistance above, but tech traders must watch the SOX index behavior every step of the way for clear guidance of what may arrive next.

Austin Passamonte

Austin is a private trader who trades emini stock index futures intraday. He currently trades various futures markets from home in addition to managing a trader's educational forum

Title: Individual Trader
Address: PO Box 633
Naples, NY 14512
E-mail address:

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Date: 01/15/02Rank: 5Comment: 

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