In the March 10th Pedagogics we wrote about the PHLX Semiconductor Index (SOX) being a leading secondary index to the NDX. The post discussed the decade-long downtrend resistance and it’s convergence with a similar length Floors & Ceilings; creating a massive wedge formation.
On a shorter-term basis (using the SMH for volume analysis purposes) – throughout March – the index created an intermediate-term Double-Top (DT) formation with a Stochastic & Volume Divergence and its neckline converged with its 50-DMA. This bearish pattern occurred at the ‘Decade Wedge’ inflection point; to a tee. Since the break the index has successfully retested its 50-DMA neckline with less volume. On Friday, the trend change was confirmed with a decent distribution volume day as the majority of the top ten stock weighted stocks* in the index turned tail at their respective retest resistance levels.
*(AMAT, TXN, INTC, BRCM, NVDA, MRVL, MU, KLAC, AVGO, XLNX)
Why is this important? When a secondary index (such as the SOX) leads the way when a potential trend change is looming, it adds to the probability factors when determining the potential weakness within the broader index. Otherwise stated, when having a technical question about where technically the NDX lays (uncertainty), this helps us reassess the probabilities of its next direction. Technicians should always evaluate secondary indices to not only help ascertain broader direction, but used as confirmation ‘of’ direction.
I hope this helps.
*Disclosure (TAM is short SMH, QQQ)