The Trend Is Not Friendly - TheStreet

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This year's choppy tape has forced all kinds of strategies through a meat grinder. But last week's action may finally set the stage for a period of directional movement. Indeed it looks like the market is starting to reveal its true intentions.

That's not to say that clarity and bullishness are the same thing. In fact, evidence suggests we're headed into a decline of magnitude and proportion.

The most obvious signal last week was the failure of the blue-chip breakout, following solid employment and retail sales data. This is big news because a failure in one direction often generates perfect dynamics for a large-scale move in the opposite direction.

In the futures markets, trends rarely reverse until an intermediate high or low gets taken out. Paradoxically, the surge of warm bodies buying a breakout or selling a breakout provides opposing fuel if they get trapped. So it goes with the indices and equities in general.

Many buyers waited on the sidelines while the

Dow Jones Industrial Average

and

S&P 500

traded below last year's bull market highs. The March 4 breakout gave the all-clear signal, pulling this money into fresh positions. When the market turned south last week, all of these bets went underwater.

While the selloff forced some shareholders to take losses, many are still hanging tough and hoping the market comes back. This group will generate a lot of selling pressure if the blue chips grind lower in the weeks ahead. There's little to suggest they'll do otherwise at this juncture.

In Victor Sperandeo's excellent book,

Methods of a Wall Street Master

, he outlines the classic "2B Reversal." This pattern describes a selling signal that triggers when a market trades just above an old high, and then breaks down. This is exactly what happened to the Dow and S&P last week. While it will take time to confirm this bearish pattern, elements are in place for that to happen by mid-April.

Let's move on and consider last week's price action in the

Semiconductor HOLDRs Trust

(SMH) - Get Report

. Readers know I've been

harping on the poor tape in the chip sector for months. Last week may have triggered a key event in the evolution of the group's mediocre performance.

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) - Get Report

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.

Alan Farley is a professional trader and author of

The Master Swing Trader

. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. At the time of publication, Farley did not have any positions in any of the stocks mentioned in this article, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback and invites you to send it to

Alan.Farley@TheStreet.com.

Also,

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