The Semiconductor Sell Signal
By Jeff Clark
January 19, 2007
It's déjà vu all over again.
Last April, as the market marched higher in spite of numerous technical sell signals, Merrill Lynch (MER) announced record earnings. The stock gapped higher, reversed, and then closed near the lows of the day. Over the following two months, shares of MER would go on to lose 20%.
The action in Merrill Lynch last April preceded an 8% correction in the S&P 500 by about two weeks.
Yesterday, as the market marched higher in spite of numerous technical sell signals, Merrill Lynch announced record earnings. The stock gapped higher, reversed, and then closed near the lows of the day.
Care to guess what comes next?
We've seen plenty of warning signs of an impending correction over the past two months. But the market keeps putting it off. Corrections, however, are like persistent encyclopedia salesmen. Eventually, you have to open the door and deal with them.
The action in MER yesterday opened the door a crack, and then the semiconductor stocks kicked it wide open.
As you can see from the following chart, the semiconductor index has broken down from a large consolidating-triangle formation...
This is a bearish development and suggests there's a lot more weakness ahead for this sector.
Since semiconductor stocks tend to lead the market, this breakdown is just one more log to fuel the correction fire. And, with all the other logs we've written about over the past few weeks, it could be one heck of an inferno.
The action in Merrill Lynch might just be the match that starts the fire.
I know the Dow Jones Industrial Average is just nine points off an all-time high. But the S&P 500 hasn't gained any ground in more than a month. The Nasdaq 100 is in the same place it was two months ago. And the Russell 2000 is actually down 2% since the beginning of the year.
Does anyone else smell smoke? Be careful not to get burned.
Best regards and good trading,
Jeff Clark
