The Trend Is Not Friendly

This exchange-traded fund, which represents the Philadelphia Stock Exchange Semiconductor Index (SOX), has been bumping against resistance at $38.80 for five months now. This key level marks a breakdown gap printed during last year's July chip selloff. Price again tested and failed this level after Intel's (INTC) quarterly update last week. It then sold off in a bearish outside day, printing the highest one-day volume so far this year.

It's clear that money is coming back out of this key sector, despite weeks of upgrades and all-around cheerleading. This follows my suspicion that institutions were dumping shares into the waiting hands of excited investors while they were talking up the group.

Last week's selloff turned a host of technical indicators for the semiconductors downward. Specifically, accumulation and relative strength readings at many levels are now moving south. This sets up a possible breakdown to the 2005 lows. So much for all the happy talk.

I was startled to hear the misguided proclamations of a rotation into tech stocks last week. Let me be clear: There never was a hint of rotation, in spite of the one-day Nasdaq Composite's spike last Monday. Examine that rally and you'll notice the session finished with decliners outnumbering gainers. This isn't characteristic of a legitimate rotation.

It amazes me that tech stocks are still vulnerable to hope-driven analysis, despite years of poor performance. This says volumes about the public's overindulgence in the sector. But how can you blame them when so-called experts are pounding the table, telling them they're missing the golden moment once again?

The charts tell a more sobering tale about the Nasdaq's prospects in the second quarter. Consider the choppy environment we've had to deal with so far this year. One truism advises that perfect order will eventually replace chaos and disorder. It's possible we'll see this year's chaotic price action gel into a major convergence event very soon. In other words, the Nasdaq may start a major trend in the next 30 days.

At the moment, the odds suggest this move will be to the downside. Last week's selloff is completing the fifth leg of a broad symmetrical triangle. Classically, this wave represents the final swing before price breaks above or below this consolidation pattern. This suggests we'll see a sharp rally to last year's highs if price pushes above the pattern.

It also predicts a nasty selloff to last year's lows if price breaks down from the triangle. It's notable that a breakdown from this level will also violate the Nasdaq's three-month test at its 200-day moving average. This is an important juncture that will tell us a great deal about the future of the bull market.

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