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  Weekend Stock Market Analysis

(8/28/04)

The major averages have now rallied two weeks in a row but they have been rising on declining volume which could become a problem if upside volume doesn't begin to pick up next week.  The Dow has now rallied above its 100 Day EMA (green line) and 38.2% Extension Level (calculated from the February high to the August low).  If the rally from oversold conditions can continue next week I would look for possible upside resistance near 10260 which is at the Dow's 50% Extension Level.  If the Dow can break above 10260 then this could lead to a more substantial move up to the 61.8% extension Level near 10380 (point A) which also coincides with the Dow's downward sloping trend line (brown line) originating from the February high.  Meanwhile a key short term support area to watch next week if the Dow pulls back some would be in the 10075 to 10110 range which coincides with the Dow's 50 Day EMA (blue line) and 200 Day EMA (purple line).  

The Nasdaq has rallied above its 23.6% Extension Level (calculated from the January high to the August low) however it still hasn't been able to break above its 50 Day EMA (blue line) near 1875.  If the Nasdaq can rally above the 1875 area next week then look for its next major upside resistance level to come into play in the 1900-1920 range which is where its 100 Day EMA (green line), 200 Day EMA (purple line) and 38.2% Extension Level reside at.  Meanwhile if the Nasdaq pulls back some next week look for short term support in the 1830-1840 range. 

As for the S&P 500 it's approaching its 50% Extension Level (calculated from the March high to the August low) near 1110.  If the S&P 500 can break above 1110 next week then look for the next area of upside resistance around the 1123 level (point B) which is at its 61.8% Extension Level.  Meanwhile if the S&P 500 stalls out near the 1110 area and pulls back some look for short term support in the 1095 to 1100 range which coincides with its 200 Day EMA (purple line) and 38.2% Extension Level.

Some sectors to keep an eye on next week include the Banks (BKX) and the Semiconductor Holders (SMH).  So far the Banks (BKX) have been doing well after breaking out of a descending triangle pattern just over a week ago which has helped the S&P 500 which is heavily weighted in Banking stocks.  In the short term a key support level to watch on any pullback would be near the June high just above 98.  If the BKX drops below 98 then its next support area would be around the 96 level which is where its 50 Day EMA (blue line) and 100 Day EMA (green line) have converged at.  Meanwhile if the BKX continues to rise then it may eventually rally back to its March high near 103 which would have a positive affect on the S&P 500. 

The Semiconductor Holders (SMH) have been struggling of late and haven't been doing nearly as well as the BKX.  A key support level for the SMH's is just above 28 which is at their 61.8% Retracement Level (calculated from the October 2002 low to the January 2004 high).  If the SMH's break below 28 this would spell trouble for the technology laden Nasdaq.  Thus we really need to start seeing some strength in the SMH's if the Nasdaq is going to move higher over the next week or two.   

Meanwhile the price of Crude Oil has dropped back to its 50 Day EMA (blue line) near 42.75 and has become somewhat oversold on a daily basis.  Thus we may see some type of minor bounce occur in the near term.  However if a bounce doesn't develop and the price of Crude Oil fails to hold support at its 50 Day EMA then its next support area would be at its 100 Day EMA (red line) near 40.75.   

As far as a few Contrarian Indicators the % difference between the Bearish and Bullish Investment Advisors continues to drop and is now around 10%.  If this trend continues this could become a good sign for the longer term.  Notice in the past when there has been an equal or greater number of Bearish Advisors versus Bullish Advisors this has led to some significant rallies (points C).  

In the short term one thing that I will be watching closely next week is the Volatility Index (VXN) which tracks the Nasdaq 100.  The VXN has fallen considerably after peaking in the upper 20's two weeks ago.  If the VXN continues lower and drops back into the upper teens (point D) this could signal a nearing top like we saw in late June (point E).

Finally some of you have asked me to show explain how my Market Timing Indicator (MTI) works.  It's actually rather simple and without getting too technical I will show some recent examples.  Basically what I look for is when the market is becoming oversold or overbought and may undergo a significant reversal.

This week I will focus on oversold conditions.  The first thing I look for is when the %K Line (light blue line) in association with the Slow Stochastics drops below a value of 20 and then rises back above it .  As you can see below just because the %K Line drops below 20 and then rises back above it doesn't always signal a significant reversal as so far in 2004 only 3 out of 7 times did a significant rally from oversold conditions occur in the S&P 500.  This is where the second key thing I look for comes into play and helps determine whether the %K Line rising above 20 is a valid signal or not.  Notice in the chart below the solid Green and Red Bars in the middle of the chart and how they transition from either a Red Bar to a Green Bar or vice versa.  For oversold conditions I look for a change in color from a series of Red Bars to a Green Bar to confirm a significant upside reversal may occur.   Thus when combining these two things together we have had 3 major oversold events so far in 2004 (late March, late May and just recently) in which the %K Line dropped below 20 (points F) and then rose back above it and a series of Red Bars then changed to a Green Bar (points G).

Also you may notice that there are times when the %K Line drops below 20 and rises back above it (points H) however there isn't a change of color from a series of Red Bars to a Green Bar (points I) which means a bottom may still not be in place.  This is why it's important to see a change in color to a Green Bar after after a series of Red Bars has been in place to confirm a possible bottom and upside reversal.

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