Semiconductors Break Out, Market Needs Rest

Indices traded higher on Friday but an overextended condition still exists despite the back and filling that took place early last week. There is no reason that overbought can't remain so for long periods of time, however, a pullback from these levels should not be contrived as bearish. The QQQQ is trading at the top of its trend channel here and risk of opening new long positions is fairly high as we begin the week. The most important development to focus on from last week's trading is the fact that the semiconductors finally broke above long term resistance levels. The SMH powered over $37, which had been holding it back for months. This breakout represents a move back over its 200-week average, territory it hasn't traded in since the tech decline started in 2000. Since the semiconductor sector is one of the best leading measures of the economy this breakout suggests that 2006 will be a very good year for US markets. Even so, it is altogether possible, and in fact even desirable that the SMH and underlying semiconductor stocks, pull back and back and fill a bit here before moving higher. A base of support has not yet been established so if this new trend is to remain healthy it should take a rest here. Scans weren't particularly strong today, but this is to be expected since the major indices are up against resistance levels. Now that the market is in a strong up trend though we should start to see some second-tier type stocks beginning to make moves as profits taken are redistributed in some speculative positions. Now is the time to be careful, but not necessarily sit on the sidelines.