Stock Market Analysis for the Dow, Nasdaq and S&P 500

(3/15/03)

The major averages had a reversal day on Wednesday followed by a strong  move to the upside on Thursday.  I'm sure many investors are wondering if this was a meaningful bottom or just another Bear Market bounce.

Let us first analyze a couple of the Contrarian Indicators to see if they are exhibiting signals of a potential bottom.  The Bullish-Bearish Sentiment continues to show a narrowing spread between the Bullish and Bearish Investment Advisors which is a positive sign.  However the % of Bullish Investment Advisors is still a few percentage points greater than the % of Bearish Investment Advisors.  Since the late 1990's most major market reversals to the upside have occurred when the % of Bearish Investment Advisors has been greater than the % of Bullish Investment Advisors (points A, B, C, D and E).  However there have been a few times when the % of Bearish Investment Advisors didn't exceed the % of Bullish Investment Advisors (points F and G) when the market reversed strongly to the upside. 

The Volatility Index (VIX) did rise into the lower 40s last week before the market turned on Wednesday however it still is below the 50 level which has signaled major turning points in the past (points H, I, J and K).  However just because the VIX hasn't broke the 50 level doesn't mean the market can't reverse strongly to the upside which has occurred a few times over the past six years (points L and M). 

Based on the Contrarian Indicators I still think it's difficult to say whether the move on Thursday was just a bounce from oversold levels or whether there was something more significant going on.

Meanwhile although the Ten Year Bond (TNX) isn't a Contrarian Indicator as I mentioned last weekend it was approaching a key longer term support area near its early October levels in the 35.50 range.  Notice how last week it bounced strongly off its early October lows as money flowed out of Bonds and back into Stocks.  A key thing to watch next week is if the TNX can break above its 20 Day EMA (blue line) near 37.50 which would be a positive sign for the major averages as more money would be exiting Bonds.  However if the TNX stalls out near its 20 Day EMA and then reverses strongly to the downside then that wouldn't be a good sign for the major averages.

As far as the major averages the Dow has broken well above its 20 Day Exponential Moving Average (EMA) for the first time since January.  If the Dow continues higher there are two resistance levels which will come into play. The first area of resistance would be at the Dow's 50 Day EMA (green line) near 8000 while a second resistance area exists at its Neckline (associated with Head and Shoulders Top pattern) around 8200.  Meanwhile if the Dow stalls out near its current levels and begins to reverse to the downside again the longer term support area to watch would be at its October 10th low near 7200.  

The Nasdaq has found support twice since February near its .618 Retracement Level around 1260 (calculated from the October 10th low to the December 2nd high).  Last week the Nasdaq was able to break above its 50 Day EMA (green line) but is near an area where it has stalled out three previous times near 1355 (points N, O and P).  The key thing to watch in the Nasdaq will be if it can break above the 1360 level which could lead to a rally back to its 200 Day EMA (purple line) near 1410.  Meanwhile if the Nasdaq stalls out for the fourth time near the 1355 level and begins to reverse to the downside again look for support at its .618 Retracement Level near 1260.

The S&P 500 also has rallied above its 20 Day EMA (blue line) after reversing strongly on Wednesday.  If the S&P 500 continues higher its first area of resistance will come into play at its 50 Day EMA (green line) near 850 while a more significant resistance area exists around the 870 level (Neckline associated with Head and Shoulders Top pattern).  Meanwhile if the S&P 500 fails to break above its 50 Day EMA and begins to reverse to the downside the key longer term support area to watch is at its October 10th low near 770.    

What needs to be watched for next week is an attempted O'Neil follow through day accompanied by strong volume much like occurred on Thursday which would be a positive for the major averages.  However if a follow through day fails to materialize next week then this would likely be a negative for the major averages.  Either way it looks like next week may end up being a critical week for the major averages. 

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