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Weekend Market Analysis

(11/1/03)

Although the major averages (Dow, Nasdaq and S&P 500) rallied this week there is one thing to keep an eye on over the next few weeks.  All three major averages appear to be exhibiting a potential small Double Top pattern.

A similar pattern occurred in the S&P 500 back in June and July as it formed a Double Top pattern and underwent some selling pressure but found support at the 960 level before eventually trending higher.  At this time it appears a similar Double Top pattern maybe developing although on a smaller scale.  If some selling pressure does develop it looks like the key support area to the downside would be around the 1020 area.

A similar potential Double Top pattern also appears in the Dow and if some selling pressure develops the key downside support area appears to be around 9500.

The Nasdaq is also showing a similar pattern and if some selling pressure develops its key downside support area appears to be near 1850.

Meanwhile the Volatility Index (VIX) is now at a level not seen since the early part of 1998 (point A).  As you can see below when the VIX has been well below 20 like it is now in 3 out of the 4 cases this has led to some type of top followed by a sell off (points B, C and D).  However as mentioned last weekend there was one occurrence when a very low reading in the VIX didn't lead to a substantial sell off which was back in early 1998 (point A).  In this case the S&P basically traded sideways for several weeks (point E) before making one more move higher (1120 to 1200).  Thus it will be interesting to see which scenario plays out this time around.

If the potential Double Top patterns fail to materialize and the major averages continue higher next week once again I would look for upside resistance at their longer term Retracement Levels calculated from the early 2000 highs to the October 2002 lows.

In the Dow the level to watch would be near 10000 which is the longer term 61.8% Retracement Level.

As for the Nasdaq look for upside resistance near the 2050 area which is its longer term 23.6% Retracement Level.

In the S&P 500 look for upside resistance near the 1065 area which is its longer term 38.2% Retracement Level.

Finally some of the stocks which have been leading the market higher over the past several months have begun to breakdown accompanied by strong volume.  Some recent examples include AAI, JCOM and NTES.

Now this can mean one of two things.  Either the market is nearing a top and potential sell off or the Institutional Money is moving their money into other sectors.  If the Institutional Money is moving their money into other sectors then you have to notice which stocks are holding up well and forming a favorable chart pattern.

One such example is NITE which has developed a small 3 week Handle (H) after forming the right side of a 2 year Cup.  What I will be watching for over the next few weeks is for NITE to break out of its Handle and above its Pivot Point which is near $14.50 accompanied by strong volume.

If by chance NITE does eventually breakout to the upside in the weeks ahead then you have to determine where it may rise too.  In the case of NITE you can look at its longer term Retracement Levels and previous areas where it has stalled out at in the past.  When I look at NITE I see two potential levels where it may run into longer term resistance if it does eventually breakout to the upside.  The first area would be at the $20 level which is where it encountered resistance at in the Spring of 2001 (point F).  Meanwhile if NITE is able to rise above the $20 level then the second area of upside resistance would probably reside at its longer term 38.2% Retracement Level near $25.  Thus this gives me an idea of what levels I may consider selling NITE at if it does follow through to the upside after breaking out.      

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