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Weekend Market Analysis

(10/25/03)

Based on the extremely low readings in the Volatility Index (VIX) over the past few weeks which dropped to a level not seen since 1998 it shouldn't have been too much of a surprise to anyone that some selling pressure developed.  In the past when the VIX has dropped well below 20 (points A, B and C) this has usually led to a top followed by some type of correction.  With that being said there was one occurrence during the past 6 years when the VIX dropped well below 20 (point D) and the market didn't sell off too badly.  Notice how the S&P 500 basically traded sideways for several weeks before making one more small move higher which occurred in the Spring of 1998 prior to the start of a large correction which began in the Summer of 1998.

As far as the major averages as I have pointed out before since March they have found support near their 10 or 20 Weekly Moving Averages on a Weekly chart which are the same as their 50 Day or 100 Day Moving Averages on a Daily chart.

The Dow bounced off of its 10 Weekly EMA (blue line) on Friday and it will be important for it to hold support near the 9500 level next week.  If the Dow fails to hold support at the 9500 level the next level of support would be at its 20 Weekly EMA (green line) near 9300.  To the upside there continues to be a significant resistance area around the 10000 level which is the Dows longer term 61.8% Retracement calculated from the early 2000 high to the October 2002 low.

The Nasdaq also bounced off its 10 Weekly EMA this week which also coincided with its upward sloping trend line (red line) originating from the March low near the 1840 area.  Thus it will be important for the Nasdaq to hold support near the 1840 level next week.  If it doesn't then the next support area below 1840 would be at its 20 Weekly EMA near 1770.  Meanwhile to the upside there continues to be a significant resistance area near 2050 which is the Nasdaq's longer term 23.6% Retracement calculated from the early 2000 high to the October 2002 low. 

The S&P 500 also bounced off its 10 Weekly EMA on Friday so it will be important for it to hold support near the 1020 area.  If the S&P 500 breaks below the 1020 area the next area of support would be at its 20 Weekly EMA near 1000.  Meanwhile to the upside there continues to be a significant resistance area around the 1065 area which is the S&P 500's longer term 38.2% Retracement calculated from the early 2000 high to the October 2002 low.

As mentioned above the major averages have found support since March either at their 10 or 20 Weekly EMA's before making another move higher.  If we go back at look at the VIX on a shorter timescale when the S&P 500 has undergone a pullback before making another move higher the VIX has risen well above its 10 Day Moving Average (blue line) such as earlier this month (point E) and back in early August (point F).  Right now notice the VIX isn't stretched that far away from its 10 Day Moving Average (point G) so we shall see if the major averages can find support at their current levels and then try and rally to new highs or whether they will have to correct further before attempting to make new highs.  

Although a lot of the leading stocks since March got sold off pretty hard over the past few weeks now is the the time to really start paying attention to those companies which are holding up well and developing a favorable chart pattern as a new group of stocks may lead the market higher as we head into the end of the year.

One such company I have been watching of late is INPH which has completed the right side of a 2 1/2 Year Cup.  Notice how INPH was up last week while the market was getting sold off.  You should be asking yourself why is INPH going up while the majority of other stocks were going down this past week?   

Now the thing to watch for over the next few weeks in INPH is to see if it can begin developing a constructive Handle to go along with its Cup.

A good example earlier in the year was EBAY which formed a Cup and then developed a 6 week Handle to complete a "Cup and Handle" pattern before breaking out in early January.  

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