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Weekend Market Analysis

(10/18/03)

As I commented on last weekend the Volatility Index (VIX) has been making new lows over the past month and is well below a value of 20 (point A) which has been significant over the past 6 years or so.  Generally when the VIX has dropped well below 20 this has signaled a nearing top followed by some type of correction (points B, C and E).  Even in a Bull Market such as we saw in the late 1990's very low readings in the VIX led to some significant corrections (points C to D and E to F) before the market made new highs so keep this in mind during the weeks ahead.

So far since March the major averages have been finding support at their 10 or 20 Weekly Exponential Moving Averages (EMA) which is the same as their 50 or 100 EMA's on a daily basis.  After bouncing off of their 10 or 20 Weekly EMA's the major averages have then rallied to make new highs.

If the same type of pattern develops again the Dow should find support either at its 10 Weekly EMA (blue line) near 9500 or at its 20 Weekly EMA (green line) near 9300.

To the upside the Dow will likely encounter significant resistance near the 10000 level which is its 61.8% Retracement from the early 2000 high to the October 2002 low.

As far as the Nasdaq if it continues to correct look for support at its 10 Weekly EMA (blue line) which is currently near 1840 and is also along its upward sloping trend line (black line) from the March low.

In the longer term the Nasdaq will likely encounter strong resistance as it approaches the 2050 level which is its  23.6% Retracement Level from the early 2000 high to the October 2002 low.

The S&P 500 should find support either at its 10 Weekly EMA (blue line) near 1020 or at its 20 Weekly EMA (green line) near 1000 if it continues to correct.

To the upside the S&P 500 may encounter strong resistance as it nears the 1065 level which is its 38.2% Retracement from the early 2000 high to the October 2002 low.

Meanwhile continue to watch the Semiconductor sector (SOX) as it has been finding support either at its 10 or 20 Weekly EMA as well since March.  The key area to focus on in the SOX appears to be around the 420 level as this is where its 20 Weekly EMA (green line), upward sloping trend line (red line) from the March low and 23.6% Retracement Level (calculated from the October 2002 low to the recent high) coincide at. 

When the market corrects it's very important to start noticing which stocks are developing a favorable chart pattern versus those that aren't.  ABAX broke out of a Cup and Handle (H) pattern this past Summer and has doubled in price since then.  If the market does begin to correct start looking for those stocks which are forming a similar pattern that ABAX was exhibiting before it broke out.

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