Good Morning, Traders. Reversal day in the markets yesterday which was rather expected as it was the fifth day upwards. As we mentioned in yesterday's commentary, the markets tend to move in odd numbers and we briefly made new highs today and then promptly backed off. This is the typical price action on what's known as a reversal day as "late to the party" bulls are still stepping up and propping up price action while those who have already been long from a lower point are unwinding positions at profit. A narrow range day which is characteristic of impending reversal ensued with some extreme relative weakness in the Nasdaq and more specifically in the Philadelphia Semiconductor Index. The $SOX got creamed yesterday and is the focus of our Big Picture commentary today. In a recent ShadowTrader Video Weekly we discussed the possibility that the Nasdaq rolls over here to the downside due to a head and shoulders pattern in the $NDX (Nasdaq 100). In the chart above, notice that the $SOX has now broken its secondary trendline on the weekly chart and is in clear danger of free falling back to its primary (lower) trendline. This would make sense technically as that same 466 area corresponds perfectly with an area to the left which was not only a congestion area, but a prior high. This confirms two basic tenets of technical analysis. Those being that old resistance becomes new support (and vice versa), and that markets generally move freely between areas of congestion, and often use those congestion areas as targets. For some time now, we have been discussing the lagging nature of the Nasdaq Composite in relation to the Dow and S&P. The weakness here in the $SOX should certainly be taken into consideration. The semiconductor stocks are the engine of the Nasdaq, due to the high concentration of semiconductor related issues both in the index. If the semiconductor index moves to the target area, then the Nasdaq will surely get even weaker and will cause even more of a problem for the ongoing rally in the S&P and Dow as far as sustainability. Be careful out there and above all be very selective.

Peter Reznicek is Chief Equity Strategist for ShadowTrader.net a subsidiary of thinkorswim, and a Principal of the Prana Fund, a hedge fund.  Mr. Reznicek can be reached at preznicek@shadowtrader.net.