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Weekend Market Analysis

(2/8/03)

 The major averages (Dow, Nasdaq and S&P 500) continue to trend lower after forming bearish Head and Shoulders Top patterns.  Both the Dow and S&P 500 had remained in a trading range during the previous nine trading days between their Necklines (8250 Dow & 870 S&P 500) and their 61.8% Retracement Levels (7900 Dow & 840 S&P 500) from their October 10th lows to their December 2nd highs.  However on Friday both the Dow and S&P 500 broke below their 61.8% Retracement Levels (points A & B).

Although the most obvious scenario at this point would be for the Dow and S&P 500 to eventually retest their October 10th lows near 7200 (Dow) and 770 (S&P 500) there is a possibility that an oversold bounce could develop in the short term before a retest of the October 10th lows occur.   If a bounce does develop from oversold conditions look for strong resistance to occur at their Necklines which are around 8250 (Dow) and 870 (S&P 500). 

The Nasdaq has broken below its Neckline in association with its Head and Shoulders Top pattern but still remains above its 61.8% retracement level (around 1265) from its October 10th low to its December 2nd high.  If the Nasdaq fails to hold support at the 1265 level then a retest of  the October 10th low near 1110 is likely.  As mentioned above an oversold bounce could develop at any time before an eventual  retest of the October 10th lows occur.  If the Nasdaq does attempt to bounce off of the 61.8% Retracment Level near 1265 look for  resistance at its Neckline in the 1320-1325 range.

 

Some of you have asked me about the rapid rise in the Put to Call Ratio this past week and if this could be a signal of a nearing bottom.   In the past when the Put to Call ratio has risen above 1.0 this has corresponded to a major market reversal such as in the Fall of 2001 (point C).  However over the past year the Put to Call Ratio has been rather misleading as it rose well above 1.0 on two separate occasions (points D & E) but this didn't correspond to a market bottom.

Meanwhile the Volatility Index (VIX) didn't spike upward much this past week and is still below the 50 level which has corresponded well to market bottoms over the past few years (points E, F & G).

 

Finally the % difference between the Bullish and Bearish Investment Advisors still remains rather high (point H) which would also suggest that the market may have to go lower before a major bottom occurs.  Notice in the past most major market reversals have occurred when the % difference between the Bullish and Bearish Investment Advisors has been at or below zero (points I, J, K, L, M & N).  

Despite the high reading in the Put to Call Ratio neither the VIX or the Bullish-Bearish Sentiment suggest enough fear has developed in the market for a bottom yet.  However this doesn't mean a bounce couldn't develop from oversold conditions in the near term before a retest of the October 10th lows occur.

Meanwhile in the weeks ahead continue to keep a list of those Stocks which are holding up well Relative Strength wise and are developing a favorable chart pattern such as a "Cup and Handle", "Double Bottom" or "Flat Base".  When the market does make a bottom and begins to reverse strongly to the upside those Stocks which break out of a favorable chart pattern first will likely become the next market leaders.   

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