Stock Market Analysis for the Dow, Nasdaq and S&P 500
(5/3/03)
The major averages especially the Nasdaq and S&P 500 have been trending higher over the past 8 weeks while the Dow has been somewhat of a laggard. The Nasdaq is approaching its early December 2002 high near the 1520 level (point A) which may act as the next area of upside resistance.
Furthermore if the Nasdaq does stall out near the 1520 level next week this would allow for the formation of a constructive 5 month low level Cup pattern.
The S&P 500 is close to its mid January high near 935 (point B) and if it breaks above that level then look for the S&P 500 to eventually stall out near its early December 2002 high around 955 (point C).
Furthermore the 955-960 area in the S&P 500 is acting as the Neckline in association with its longer term Inverted Head and Shoulders pattern which might be a difficult barrier to break initially.
As for the Dow it finally was able to close substantially above its 200 Day EMA (green line) for the first time since last year at this time. The Dow has been lagging behind the Nasdaq and S&P 500 and if it moves higher next week will probably encounter resistance around its mid January high near 8850 (point D).
In the longer term the Dow has an even stronger area of resistance just above the 9000 level which is related to the Neckline in association with its Inverted Head and Shoulders pattern. For the Dow to be bullish in the longer term it will eventually have to break above the 9100 level.
So far I have been surprised there hasn't been a larger exodus from Bonds back into Stocks as the Ten Year Bond (TNX) still hasn't broken strongly to the upside as the market rallied last week. The TNX has been in a trading range over the past 6 weeks between 37.75 and 41.25. If the TNX can break above the 41.25 area then that would be a positive for Stocks and a negative for Bonds. However if the TNX drops below 37.75 then that would likely lead to some selling pressure in stocks instead. So continue to watch the TNX for a significant break to the upside or downside.
Meanwhile the Volatility Index (VIX) still remains rather low although it still hasn't dropped below a reading of 20 which in the past has signaled a nearing top. The question remains can the major averages make another significant move higher with the VIX currently this low? Since 1998 there really has been only one case where the major averages didn't sell off significantly despite a low reading in the VIX. Back in the the Fall of 1998 when the S&P 500 formed a "Double Bottom" pattern the VIX dropped into the lower 20's (point E) however the S&P 500 basically traded sideways for 4 weeks (point F) before making another move higher.
Over the past few weeks there have been several stocks forming the right side of multi-month Cup's however many of these stocks need to trade sideways for a period of time and develop a constructive Handle before making another significant move higher. If the major averages do begin to stall out over the next week or two and begin to pullback some I think that would actually be constructive as this would allow for several stocks to develop a proper "Cup and Handle" pattern before attempting to move higher.
An example of a stock which has formed the right side of a multi-month Cup is MATK. Now what we would like to see is for MATK to develop a constructive Handle over the next 2 to 4 weeks before attempting to make another significant move higher.
MVL provides a good example of what a stock should do after it forms a Cup. Notice how MVL traded sideways for 6 weeks while developing a Handle before breaking out on the 7th week accompanied by strong volume (point G). Since breaking out in early January MVL has nearly doubled in price and has been our best performer in 2003.
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