Internet Index Loses Steam at 261.8%

The Internet Index has been on a tear since early September and we noted on are call about 6 weeks ago that it had approached the 100% retracement level. I thought that it might find that as resistance, but it didn't and continued it's rally to the 161.8% area, paused for 2 days and then made an ascent to the 261.8% fueled by strong Google earnings.

The pull back from the 261.8% started innocently on Wednesday and had a mild pull back to 530 and bounced. Today it continued but in the process it destroyed the primary upward trendline that had held so well over the 2 month rally. Although it bounced a bit today, the break of the trendline was severe, and it's been my experience that when a primary trendline is broken, the next extended move is a retest of the secondary trendline which in this case quite a ways down. This retest may take months to develop, but do keep an eye on this index as it's been the major component to fuel the NDX over the last few months.

The key area to watch now is the primary trendline (green dotted line) to see if the index can pop back above and continue it's ascent on the 423.6% level. A more likely scenario would be to kiss the bottom of that trendline and consolidate for a while as it digest the parabolic move up over the last 3 months. The price action will tell so keep your eyes on the chart.

Internet Index 3 Month / Daily Chart