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Weekend Stock Market Analysis

(4/17/04)

Looking at the major averages from a longer term perspective the Dow has been holding support above its 23.6% Retracement Level (calculated from the October 2002 low to the February 2004 high) and 40 Weekly EMA (blue line) after peaking in February near 10750 while undergoing a corrective 4th Wave.  It still not clear whether the low made in late March was the beginning of the final upward moving 5th Wave in association with Elliot Wave Theory or whether it was just an oversold bounce.   One thing is for sure the 9900 to 10000 range is a key longer term support area for the Dow.  If the Dow breaks below 9900 this would likely lead to a drop back to its longer term 38.2% Retracement Level near 9400 (point A).

The Nasdaq found support in late March near its 23.6% Retracement Level (calculated from the October 2002 low to the January 2004 high) and 40 Weekly EMA (blue line) near 1890 while undergoing a corrective 4th Wave.  Just like the Dow the question is was the low made in late March the end of the corrective 4th Wave and the beginning of the final upward moving 5th Wave or was it just an oversold bounce?  Meanwhile the Nasdaq has a key longer term support area near 1890 which will need to hold for the Nasdaq to be constructive.  If the Nasdaq breaks below 1890 the next downside support area would be at its 38.2% Retracement level near 1750 (point B).

As far as the S&P 500 it has held support above its longer term 23.6% Retracement Level and 40 Weekly EMA (blue line) since peaking in early March and undergoing a corrective 4th Wave.  As with the Dow and Nasdaq the question remains was the low made in late March the end of the corrective 4th Wave and beginning of the final upward moving 5th Wave or was it just an oversold bounce?  Although the S&P 500 found support in late March near 1090 I believe the key longer term support level to watch in the weeks ahead is in the 1075-1080 area (point C) which coincides with the S&P 500's 23.6% Retracement Level and 40 Weekly EMA (blue line).  

Meanwhile looking at a few sectors the Semiconductor Holders (SMH) may have already completed their Elliot 5 Wave pattern and are now undergoing a longer term correction.  A key support level to watch in the near term is around 37 (point D).  If the SMH's break below 37 then the next area of downside support would be near 35 which is their 38.2% Retracement Level calculated from the October 2002 low to the January 2004 high.  

A simplified chart of an Elliot 5 Wave Pattern 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.   Also notice that once the 5 Wave pattern completes itself that this is followed by a longer term correction.  

Meanwhile the Banking sector (BKX) which is heavily weighted in the S&P 500 is showing a Head and Shoulders Top pattern.  The BKX broke below a key support level last week near 98 which coincided with its Neckline and 100 Day EMA (green line).  The key thing to watch next week is will the BKX break above the 98 level and rally back to its 50 Day EMA (blue line) just above 99 or will it stall out near 98 leading to a potential drop back to its 200 Day EMA (purple line) near 94?      

As far as the major averages in the near term the Dow has resistance around 10575 (point E) so if it tries to rally next week this is where it could stall out at.  Meanwhile if the Dow comes under some selling pressure look for initial support at its 100 Day EMA (green line) around 10275.  A break below 10275 would likely lead to a retest of the late March low near 10000 (point F). 

The Nasdaq is near its 100 Day EMA (green line) and has upside resistance around 2080 (point G) while a key support level exists in the 1890-1900 area which coincides with its late March low (point H) and 200 Day EMA (purple line).   I would be surprised if the Nasdaq just nosedives down to the 1890-1900 level without first going through some type of possible bounce as it's becoming somewhat oversold based on the Slow Stochastics.  Notice that in most cases when the %K Line has dropped to 20 or below (points I) this has signaled the potential for an upside reversal except in mid March when the Nasdaq only rallied for a day (point J). 

As far as the S&P 500 if it rallies next week look for upside resistance around 1050 (point K).  Meanwhile if the S&P 500 drops below 1120 look for initial support at its 100 Day EMA (green line) near 1110. 

Finally even though a majority of stocks will follow the trend of the market noticing those that are acting well while the market is correcting can still lead to substantial gains.  TASR is an excellent example of this as it continues to surge higher.  When looking at the overall chart of TASR during the past 2 years shows that it initially broke out of a Cup and Handle (H) pattern in September of 2003 and then went from $8 to $31 by December of 2003.  Those investors who missed the initial breakout in TASR were given a second opportunity as it then developed a small 5 week Flat Base (FB) before breaking out again in Janaury of 2004 accompanied by strong volume (V).  Over the next 5 weeks TASR doubled in price going from $31 to $64.  Meanwhile those investors who missed the original breakout and second breakout were given a third opportunity as TASR developed a small Symmetrical Triangle (ST) in February of 2004 before breaking out again in mid March accompanied by strong volume (V).  Over the past 6 weeks TASR has nearly doubled in price once again.

The chart of TASR shows three chart patterns  to look for (Cup and Handle, Flat Base and Symmetrical Triangle) when screening for stocks to invest in.  The key is to recognize those chart patterns before a stock breaks out and not afterwards.   

  

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