Semis Lead the Way to a Strong Start for 2006

A couple of months ago we noted that the NASDAQ 100 (QQQQ) and the semiconductors (SMH) were leading the rally that started last October. In late November, early December both of these indices broke above multi year resistance levels and we noted that these breakouts would have a significant impact on trading results for 2006. After breaking out, these two indices along with the broad market spent the month of December moving sideways in consolidation modes. Towards the end of the month when the Santa rally failed to arrive bears were preening and bulls were singing woes as both groups looked for the sky to fall. We remained obstinately bullish during December's pull back for what we believe are good reasons. Friday our reasons for remaining bullish were profoundly confirmed on two important weekly charts (keep in mind that a weekly chart view is much more reliable at determining the longer term direction of a stock or an index than the daily view). Over the past 20 or so years one overlying truth has been that the market cannot sustain a move without the semiconductors. This may not be true forever, but at this time we find that the semiconductor sector remains an important leader. It is very bullish then that the semiconductor sector has taken the lead once again and as of Friday this sector has strongly confirmed November's breakout. After a test of support the SMH bounced back strongly last week and on Friday a breakaway gap over multi year resistance was achieved. Despite what the talking heads might say, despite how poorly the bears paint the economic picture, despite all the negativity you are bound to hear over the coming months, keep in mind that the chart says that smart money has been accumulating and now shorts are starting to realize that they have been wrong. We are now in the early phase of a strong move.

The QQQQ chart is interesting here, for while it also confirms the strong breakout, it is up against its overhead trend channel resistance. One of two things can occur here. Either it can maintain its current slow climb and pull back to support or it can break higher as the trend accelerates. Friday's strength suggests that the trend will accelerate. The strength of the broader market suggests as much as well.