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Weekend Market Analysis

(10/11/03)

A few weeks ago it looked like the market was close to making a top however all three major averages once again found support either near their rising 10 Weekly EMA's (same as 50 Day EMA) or 20 Weekly EMA's.  This trend has been in place since last March as shown by the charts below.

Meanwhile it also appears for those of you that follow Elliot Wave Theory that the Nasdaq is still in Wave #3 which began in March.

Once again a quick review for those of you not familiar with Elliot Wave Theory and what a "5 Wave Pattern" looks like is shown below.  

Notice how Waves 1,3 and 5 are upward moves with Wave 3 lasting the longest while Wave 5 is the shortest.  Meanwhile also notice that Waves 2 and 4 are corrective Waves which only last for a brief period of time before the upward trend continues.   As shown above it appears the Nasdaq is still in a Wave #3 stage.

Thus the question remains how high will the major averages go before we see a corrective 4th Wave develop?  Looking at the longer term Retracement Levels calculated from the early 2000 highs to the October 2002 lows may give us some idea.

For the Dow its longer term 61.8% Retracement Level is near 10000 (point A). 

As for the Nasdaq its longer term 23.6% Retracement Level is near 2050 (point B).

The S&P 500's longer term 38.2% Retracement Level is around 1065 (point C).

These would be the areas I would be watching for significant resistance to occur at leading to a possible corrective 4th Wave in the weeks ahead.

Meanwhile the Volatility Index (VIX) continues to drop and is now at levels not seen since the Summer of 2000.  So far the very low readings in the VIX haven't led to a major correction however you have to wonder if eventually this will change.

Comparing the S&P 500 to the VIX since the late 1990's shows that in most cases when the VIX has dropped well below 20 (points D, E and F) that some type of correction has occurred.  

Finally a key sector to watch is the Semiconductors (SOX) which looks to me is getting ready to make a significant move in one direction or the other soon as its longer term downward and upward sloping trend lines (red lines) have continued to narrow and are converging at a key resistance zone near the 475-480 area.  The 475-480 area also coincides with the SOX 200 Weekly EMA (green line) and longer term 23.6% Retracement Level calculated from the early 2000 low to the October 2002 low.  At this point I can't tell you which direction the move will be but more than likely it will be significant when it occurs and could lead to a quick 100 point move either to the downside or upside.  

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