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Weekend Stock Market Analysis
(8/26/06)
This week the major averages went through a consolidation phase
after they rallied strongly the week before. During the past six trading
days the Nasdaq has developed a trading range between its 200 Day EMA (blue
line) near 2175 and its 50 Day EMA (green line) near 2120. I doubt this
trading range will last much longer and we will see a significant move develop
either next week or the week after. If the Nasdaq can rise above its 200
Day EMA near 2175 then I would expect its next area of upside resistance would
occur in the 2195 to 2235 range. The 2195 area (point A) corresponds to
the Nasdaq's 50% Retracement Level (calculated from the April high to the July
low) and is also where it stalled out at in early July. Furthermore the
2235 area (point B) corresponds to the Nasdaq's 61.8% Retracement Level and is
also where it stalled out at in early June after attempting to rally from
oversold conditions. Meanwhile if the Nasdaq were to break below its 50
Day EMA near 2120 then I would expect to see an eventual retest of the mid July low near
2010. 
The key to further upside movement
in the Nasdaq will likely depend on what the Semiconductors do. The
Semiconductor Index (SOX) so far has held support right at its 50 Day EMA (green
line) near 430 after its big upward move the previous week. If the SOX can
hold support at its 50 Day EMA and then begin to rally it should be able to rise
up to its 200 Day EMA (blue line) near 460 which would have a positive affect on
the Nasdaq. However if the SOX breaks below its 50 Day EMA then look for
an eventual retest of its mid July low near 385 which would have a negative
affect on the Nasdaq. 
As
far as the Dow it's still exhibiting a potential Double Bottom pattern (looks
like the letter W) and so far has held support above its 20 Day EMA (blue line)
near 11230. If the Dow continues to hold support at or above its 20 Day
EMA and then makes another move higher then it could possibly make a run at its previous May high near 11670. Meanwhile if the Dow were to drop below
its 20 Day EMA near 12230 then its next level of support would either be at its
50 Day EMA (green line) near 11160 or at its 200 Day EMA (purple line) near
11000. 
The S&P 500 is also exhibiting a
potential Double Bottom pattern and has been holding support above its 20 Day
EMA (blue line) as well. If the S&P 500 can continue to hold support
at or above its 20 Day EMA and then makes another move higher this may lead to a
rise back to its previous May high near 1325. Meanwhile if the S&P 500
were to break below its 20 Day EMA near the 1284 level then look for support
either at its 50 Day EMA near 1275 or at its 200 Day EMA (purple line) around
1265. 
Finally
if the major averages are able to make one more move higher continue to focus on
those stocks which have formed a favorable chart pattern. For example PXP
from our current Stocks to Watch List has completed the right side of a 6 month
Cup and has developed a small 2 week Handle (H). Normally I like to see a
stock develop a Handle of 3 weeks or more after forming a Cup so we shall see if
PXP can work on its Handle for one more week before attempting to breakout of
its Cup and Handle pattern. 
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