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Weekend Stock Market Analysis

(4/3/04)

The rally from oversold conditions followed through this past week and hopefully we are seeing the development of the final upward leg (5th Wave) to complete a longer term 5 Wave Pattern based on Elliot Wave Theory.  Once again 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.  

As talked about above is last weeks rally the end of the corrective 4th Wave and the beginning of the final upward moving 5th Wave?

Keep in mind if we are seeing the development of the final upward moving 5th Wave this rally will have a shorter duration than the previous two upward moving waves (1st and 3rd Waves).  The first upward wave began in October of 2002 and lasted only 2 months so if a similar pattern develops then the final upward moving 5th Wave could peak within in a month or two. 

As far as the near term the major averages have quickly reversed from being oversold to now being somewhat overbought.   The Volatility Index (VIX) has quickly dropped after peaking a few weeks ago as the S&P 500 was nearing a bottom.  As you can see when the VIX becomes stretched away from its 10 Day MA (points A) and the %K Line (associated with the Slow Stochastics) drops below 30 (points C) this is usually a fairly reliable signal of the market becoming oversold which may lead to significant upside reversal (points B to D).

In the near term the VIX has quickly become stretched significantly away from its 10 Day EMA in the other direction (point E) while the %K line has risen to around 90 (point F).  This indicates to me that the market has become rather overbought and may have to pullback some and consolidate its recent gains before making another move higher.  

The Dow has risen back above its 50 Day EMA (blue line) near 10400 and needs to hold at or above it to remain constructive next week if some type of pullback occurs.  Meanwhile if it continues higher I would expect some resistance to develop near 10600.  

The Nasdaq has risen 160 points over the past eight trading days and has rallied back above its 50 Day EMA but may encounter some resistance next week near 2070 (point G) or 2090 (point H).  Meanwhile if the Nasdaq pulls back some next week I would look for initial support near its 50% Retracement Level (calculated from the January high to the March low) around 2025.

The S&P 500 has also risen back above its 50 Day EMA and will likely encounter resistance near its previous high near 1160 (point I) if it continues higher next week.  Meanwhile if the S&P 500 pulls back some next week I would look for support in the 1125 to 1134 range.

Finally when the market is going through a correction it's important to keep an eye on those stocks which are holding up well and developing a favorable chart pattern as those will usually provide the best opportunities once the market makes a bottom and begins to rally.   AH which held up well as the market corrected in February and March developed a classic "Cup and Handle" pattern before breaking out this past week accompanied by an increase in volume.   Before breaking out last week AH was in our "Stocks to Watch List" based on its developing favorable chart pattern.

How can a Premium Membership to amateur-investor.net benefit you as an investor?   We focus on stocks which are exhibiting favorable Sales and Earnings Growth that have developed a favorable chart pattern such as a "Cup and Handle", "Double Bottom", "Flat Base" or "Symmetrical Triangle".  These stocks are then included in our "Stocks to Watch List" which gives investors a quick reference to those stocks which may provide the best buying opportunities to the long side in the weeks ahead.  Each stock in our "Stocks to Watch List" includes specific Buy Prices, Stop Loss Prices (very important) and projected Target Prices.   

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