Chart Notations 

• The SMH is an Exchange Traded Fund that focuses purely on the Semi-Conductor Sector. Although it is very closely tied to the "SOX" Index, it does not have a true 99%+ correlation to the Index, unlike other ETF's that are specifically designed to track popular Indices. Over the larger time-periods however, the correlation to the SOX is greater, as the trends in larger time frames tend to show higher correlations among stocks, and especially specific sectors. 

• The SMH consists of 20 large-cap Semi-Conductor corporations, the biggest of which are Intel and Texas Instruments, each carrying almost 20% weighting, while the third largest would be Applied Materials, accounting for almost 15% of holdings.

• An additional factor that makes the SMH somewhat unique to other ETF's is that despite its relatively small size ("only" $1.4 billion in assets, ranking 63rd in size among all ETF's), it ranks in the top 10 of Intraday volume traded. This means that the SMH is much more popular as a "trading" ETF rather than an "investing" ETF. Traders love the SMH for its abundant liquidity and great potential for volatility.

• Let's take a look at the Monthly chart of the SMH above. In our analysis, we address the Intermediate-and-Long-Term Time Horizon

• Our Technical marks of the SMH above are very similar to our viewpoint of the SOX index in our regular issues. Note that the range of the SMH from 2002 to 2006 has narrowed into a triangle (blue) and in early 2006, prices broke-out of the triangle and SMH dropped to the bottom of its range. 

• Note that during the period in 2000 through 2002 (unseen in the chart) the SMH, along with the rest of the Technology market, experienced a severe blow to the downside (loss of over 80%), and that the chart we see above only highlights the recovery attempt. 

• At this point, the action we have seen over the last few years is a market that is just "leveling" after a serious shock to the downside. In our chart, notice that the fastest declines are still to the downside. It looks to me as if the worst is over, although this is still a very vulnerable market. As a result, we hold a neutral-to-bearish posture for this market in this time frame. We shall consider the Bullish scenario on trading above the green line only. Note the other technical marks of significance. 

Chart Notations 

• The Weekly Chart of the EEM addresses the Intermediate-to-Long-Term Time Horizon

• The EEM is the 5th largest Exchange Traded Fund with over $15 billion in assets. In intraday volume, it ranks number 6. This ETF is very different from our first fund in this issue, the SMH, because it encompasses a very diversified group of stocks from a variety of sectors, industries, as well as geographic locations. The EEM is designed to track the MSCI Emerging Markets Index, investing in top corporations from 25 different countries. 

• The EEM has been on a tremendous uptrend since its inception in 2003. It experienced a violent correction of 27% magnitude in 2006 – this correction is detailed in the chart above. Note that it has spent the second half of 2006 recovering and has had enough bids and momentum to move to new all-time highs by the end of '06. 

• It is very important to note that the EEM is quite unique to many other popular ETFs when we do our Price Behavior Analysis of this market. The EEM does not have the technical precision of other ETFs most probably due to its international diversity – this is a common characteristic for geographically diverse Index and Funds. As a result of this disconnection in technical protocols, the support and resistance tend to be much wider in range than in other ETFs, we should therefore allow a little more technical leeway in this regard.

• The gray trendline above is very steep, and there has been enough loss of momentum on the EEM to suggest a very high likelihood that the trendline will be fully broken soon. This break is not going to be as important as the blue and red S/R lines - these will play a more significant role in keeping the preceding upward momentum intact. 

• The critical line for long-term would be the purple line. Sustained trade below would turn the mega-uptrend that preceded our chart here to the downside into a prolonged, multi-year correction. As long as the EEM is able to maintain trading above this, the propensity for the EEM to continue moving higher to the stratosphere over the Intermediate-to-Long-Term is very much in play.

Until next week, happy trading!

© 2007 Fernando Gonzalez 
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Fernando now enters his 10th year as an active trader, technical analyst and content contributor to the Active Trading community and a long list of popular financial media. In 1999 he authored the best-selling book Strategies for the Online Day Trader (McGraw-Hill 1999), one of only a handful of books on the topic that have ever reached the top 5 overall best sellers on Amazon.com. In 1998, he was one of the original founding members of the Online Trading Academy team, having developed the original material and coursework. Fernando continues today as Newsletter author, course developer and Instructor here at OTA, where he teaches his highly regarded "Broad Market Analysis" class.

DISCLAIMER: 
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results.

ABOUT THE WEEKLY REVIEW: 
The weekly review heavily focuses on the application of Technical Analysis on the Broad Market Levels. You will rarely see individual Stock Picks on the Weekly Review! It is the author's belief that most Individual Stocks (certainly not all) will follow the overall direction of the Broad Market that surrounds them, as well as the Sectors they comprise. Discussion is focused heavily upon the Major Market & Sector price activity.

Rarely also will you see discussion of the fundamental, macro-economic or political nature in the Weekly Review. By focusing only on the technical, or price & volume aspects of the major measures of the market, Fernando hopes to satisfy any equity trader's needs for a qualified discussion and forecast of the overall direction of equities, whether it be the Short, Intermediate, or Long-Term time horizons. Whether you trade the Index Futures, Index Tracking Stocks or Individual Equity Market Instruments, having an experienced eye on the conditions of the broad market that surrounds you is extremely important!