Stock Market Analysis for the Dow, Nasdaq and S&P 500
The major averages (Dow, Nasdaq and S&P 500) continue in a pullback mode which isn't too surprising after rallying strongly from March 12th to March 21st. The Dow has fallen back to where its 20 Day Exponential Moving Average (EMA) and 50 Day EMA are converging at near 8100. Furthermore the Dow's .382 Retracement Level from the March 12th low to the March 21st high is 8092 so the 8100 level is a critical short term support area to watch next week. If the Dow fails to hold support near the 8100 level then it could quickly drop back to around the 7800 area which is the .618 Retracement Level calculated from the March 12th low to the March 21st high.
The Nasdaq so far been able to hold support just above its 20 Day EMA (blue line) and 50 Day EMA (green line) since making a short term top on March 21st. Thus the key support area to watch next week would be in the 1350 to 1360 range. If the Nasdaq is unable to hold support in this range then it may drop back to around 1320 which is along the Neckline associated with its previous Head and Shoulders Top pattern.
The S&P 500 has also been pulling back after rallying strongly the previous two weeks. The critical support area to watch next week is near 855 which is where the S&P 500's 20 Day EMA (blue line) and 50 Day EMA (green line) are converging at. In addition the .382 Retracement Level from the March 12th low to the March 21st high is also right at 855. If the S&P 500 fails to hold support near the 855 area then this could lead to a drop back to the 830 level which is the .618 Retracement Level calculated from the March 12th low to the March 21st high.
Meanwhile looking at the Ten Year Bond (TNX) shows it has fallen back to where its 20 Day EMA and 50 Day EMA are converging at near 38.75. If the TNX fails to hold support next week near the 38.75 look then look for a drop back to the 37.75 area which is along the Neckline associated with its previous Head and Shoulders Top pattern. In addition the 37.75 area is also at the .618 Retracement Level calculated from the March 12th low to the March 21st high.
Normally I would have treated this past week as just a necessary pullback after advancing strongly from the March 12th lows. However keep in mind future world events involving the war in Iraq or Terrorism could have a dramatic impact on the market in the weeks ahead which can't be factored in. Thus expect quite a bit of volatility in either direction depending on whether the news is negative or positive.
Finally continue to focus on those stocks which are breaking out of a favorable chart pattern accompanied by decent volume. OPTC provides an excellent example of what to look for when analyzing a stock's chart pattern.
OPTC formed a 5 month Cup from October of 2002 into February of 2003. It then developed a 2 week Handle with a trading range between $6.25 and $7.25 before breaking out a few weeks ago on decent volume (point A).
Meanwhile further analysis reveals that after OPTC made a significant move from late December through mid February while forming the right side of its Cup it held support near its 20 Day EMA (blue line) as it began developing a Handle. Also note OPTC didn't drop below its .382 Retracement Level near $6.00 (calculated from the late December low to the mid February high) either. Many times you will find that after a stock makes a significant advance it will pull back anywhere from 23.6% to 38.2% before making another move higher.
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