Net-Stock Slide Triggers Technician Scrutiny

Technicians are watching some key levels in the DOT index, which closed down nearly 5% today.
Author:
Publish date:

After one down day among the last eight, is it fair to say that this could be the start of a bigger decline in the Internet sector? Perhaps.

TheStreet.com Internet Sector

index finished down 56.58, or 4.9%, at 1,097.43. It had reached record-high closes in each of the previous seven sessions. A strong retail sales report and a subsequent drop in Treasuries were the catalysts for traders to take profits.

John Murphy, president of

murphymorris.com

, a Web site about technical analysis, admitted that it has been tough to call a top in the market, but he does see some indications that suggest a short-term top may be in place among technology and Internet stocks. Murphy sees the Net sector in an uptrend as long as some key support levels hold on the way down.

Murphy said that momentum indicators for DOT index were recently at overbought levels not seen since April, when the DOT went on an extended selloff, which left it roughly 50% lower by August. Those indicators, he said, were weakening.

"I'm not saying it's a top, but if you asked me if we've reached a dangerous level, I'd say yes, where some type of profit-taking is possible," he said.

Murphy said both the semiconductor sector (as measured by the

Philadelphia Stock Exchange's

semiconductor index) and Internet sector have been pacing gains in the tech sector, but the SOX has weakened over the past week and finally took out support at the Nov. 30 low of 608, leaving him to believe it was only a matter of time before Net stocks also dropped.

"There are a lot of things kicking in at the same time that lead me to suspect we're putting in a short-term top," said Murphy. "It's been tough calling it, but it's beginning to look a little more convincing."

As for levels to watch, Murphy said the first level of support in the DOT would be around 1,052, which was the low from Dec. 9. But he said a retracement was likely to come back to the 1,000 level, which is the peak from around Nov. 29 and also a one-third pullback from the Oct. 18 low of 651.08 to today's intraday high of 1,171.35. Below 1,000, the next level of support is the December low of 915.02, made on Dec. 1.