Thursday, January 22, 2015
One of the market's leading stocks is breaking down.
Semiconductor giant Intel was one of the top-performing stocks in 2014. But it's struggling so far this year. Even after reporting terrific fourth-quarter earnings last week, shares of Intel can't gain much traction. The stock looks vulnerable.
And it could mean trouble ahead for the stock market...
As regular Growth Stock Wire readers know, Intel tends to lead the broad stock market. If Intel goes up, the stock market likely will as well. And declines in the stock market will be short-term and shallow.
That's what we saw happen in April and August.
In April and August, the S&P 500 broke below its 50-day moving average (DMA). Most technical analysts view the 50-DMA as the "line in the sand" separating intermediate-term uptrends from intermediate-term downtrends. So when an asset is trading above the 50-DMA, it's bullish. When it's trading below the 50-DMA, it's bearish.
But even though the S&P 500 was below its 50-DMA, Intel was holding above its 50-DMA. This gave traders a strong clue that the market weakness would be short lived... And it was. Stocks bounced following the drop in mid-April, and the market rallied off oversold conditions in August.
On the other hand, when Intel shares fall, the stock market tends to fall as well.
That's what we saw in September and October.
In September, Intel broke down below its 50-DMA. I told you the stock was warning there was likely more downside in the market ahead. That's exactly what happened. The S&P 500 fell more than 5% from September 30 to October 16.
So where is Intel telling us the market is headed now?
Let's take a look...
Notice how the chart has strung together a recent series of lower highs and lower lows. That's similar to the action we saw back in September – just before Intel broke below its 50-DMA and fell 10% in a couple weeks.
The stock is just barely holding above the support line of its 50-DMA right now.
If Intel can hold above its 50-DMA and bounces from here, the stock market will hold up as well.
But if Intel breaks down below support, watch out. The market will be in trouble.
Here's an updated look at the S&P 500 chart I showed you last week...
Prior to last week, the S&P 500 was trading in a bearish rising-wedge pattern (the blue lines). In this pattern, an index makes consistently higher highs and higher lows but the distance between each new high and low is smaller. Eventually, the index has to break out of the pattern one way or another.
And last week, it broke to the downside. The S&P 500 fell below the support line of the pattern. It then bounced back up and is now retesting the line as support.
If Intel can bounce from here, then the S&P 500 should be able to rally back inside the wedge. And the bulls will regain momentum.
But if Intel breaks below support, the S&P 500 will likely fall toward one of its lower support areas at about 1,972 or (gulp) 1,870.
So keep an eye on the action in Intel. It will tell us where the market is likely headed in the short term.
Best regards and good trading,
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