Nov. 14, 2006 — We've seen the enemy and he is us! If the bears can't take the market down this week, they have nobody to blame but themselves. As last week commenced, the setup in the markets were tailor made for a continuation of the corrective action spawned by the bearish candle formation on Oct. 27 and follow through day on Nov. 1. This column even anticipated a flat opening to the week based on the deteriorating technicals coupled with the potential of a Democratic win in the election. For the week, it turned out we were only half right as the S&P 500 failed to confirm the new high in the Dow and the SOX gave back 61% of it's gains for the week. But the NDX, which is the true market leader, finally made a new 2006 high. Overall, our expectation for a choppy market has been met.
We have spent a lot of time on SOX leadership in this column and rightly so. However, another sector has provided much of the soul of this rally since 2002. It was the biotech sector, which bottomed first in July 2002. If the SOX is the brains of the market, the biotech is the heart. We live in a computer society and chips are the most important product. However, markets are engaged by real people who desire to make vast sums in the shortest time possible. Much of the rampant bullish speculation that fuels bull markets has taken place in the biotech sector. A case can be made that tech has stayed up as long as it has without SOX leadership because the biotechs have picked up the slack.
The winds of change may be upon us. On Thursday, the BBH (Biotech Holders Trust) and BTK (Biotech Index) traced out huge black candles at key cluster points of Fibonacci interwave resistance. Any follow through here can lead to an intermediate term top for the biotechs. The NASDAQ/NDX will have a very difficult road without biotech leadership in the face of a semiconductor index, which has not confirmed any new highs in this cycle.
Bear options players jumped all over this development on Friday as the put/call ratio jumped .14 to close at .98 despite a market that was up on the day. In the near term, this implies they are attempting to sell a bounce. Normal behavior has the p/c spiking up on down days, which implies fear. A spike on an up day usually means bears are wrong at least in the very near term. For markets to drop, we need the put/call ratio to become more euphoric on up days and have bull option players attempt to buy the dip on down days.
As we put all of the pieces of the puzzle together, the technical picture is deteriorating slowly. The biotech candle formation should be viewed as a warning of things to come. The uptrend is still intact but getting weaker. The semiconductors hit a secondary high last week on the 76th (Lucas) day of the cycle. It traced out a bearish evening star pattern but did not get the follow through on Friday. It bounced right off a key 61% retracement level, which implies it is still attempting to retest last week's high. The Dow still has a higher target at 12360. What I am looking for is a continuation of the choppy action for one more week. On Friday we attempted another bounce and I will give it the benefit of the doubt to start the week. However, these indices are doing their own thing and I look for a split tape. We could still see new highs in the Dow and perhaps the NASDAQ but see other areas not confirming (NDX, SOX, S&P 500 or BTK).
Jeff Greenblatt
Fibonacciman@aol.com
