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  Weekend Stock Market Analysis

(8/7/04)

The key average to watch next week is the Nasdaq and whether it will be able to hold support at its key longer term 38.2% Retracement Level near 1755 (calculated from the October 2002 low to the January 2004 high).  Future market direction will likely depend on whether the Nasdaq can find support at this level or not.  If the Nasdaq can hold support near the 1755 level then that would be a positive.  However if the Nasdaq drops below 1755 then this would likely lead to an eventual drop back to its longer term 50% Retracement Level near 1630 (point A).

As far as the Dow it has failed to hold support at its May low near 9850 (point B) and longer term 23.6% Retracement Level near 9900 (calculated from the October 2002 low to the February 2004 high).   From a technical standpoint it appears the next major downside support area in the Dow would be at its longer term 38.2% Retracement Level near 9400 (point C).  However the Dow may encounter an intermediate support zone around 9600 which could lead to some type of oversold bounce. 

The S&P 500 has also failed to hold support at its May low near 1077 (point D) and longer term 23.6% Retracement Level near 1070 (calculated from the October 2002 low to the March 2004 high).  Although the next major downside support area for the S&P 500 appears to be at its longer term 38.2% Retracement Level near 1010 (point E) it could possibly find support somewhere in the 1035-1050 range and undergo some type of oversold bounce.  

As far as a few sectors the Semiconductors (SOX) are at a key longer term support area associated with their longer term 50% Retracement Level near 385.  I believe future action in the market will depend on what the SOX does from here.  If the SOX can hold support near 385 next week this could set the stage for a possible oversold bounce.  However if the SOX breaks  below 385 then look for it to drop back to its 61.8% Retracement Level near 345 (point F) which would lead to additional selling pressure in the market. 

Meanwhile as I mentioned last weekend the Banks (BKX) had developed a descending triangle pattern as their downward and upward sloping trend lines (black lines) were converging and looked like they were going to make a solid move in one direction or the other.  It looks like the BKX is breaking to the downside and the key support area to watch next week is at the May low just below 91 (point G).    

As far as the Contrarian Indicators we are now seeing more fear develop in the market as both the VIX and VXN are now rising strongly as investors begin to panic.  When the S&P 500 reversed direction in March and May the VIX rose into the lower to mid 20's (points H).

Meanwhile the VXN rose into the upper 20's to around 30 (points I) when the Nasdaq turned around in March and May.

I believe the two things to watch next week are whether the Nasdaq can find support at its longer term 38.2% Retracement Level near 1755 and whether the Semiconductor sector (SOX) can hold support at their longer term 50% Retracement Level near 385.  If the Nasdaq and SOX can find support at the above mentioned levels next week this could lead to a significant oversold bounce.  However if the Nasdaq and SOX fail to hold support at the above mentioned levels then this will lead to more selling pressure pressure in the market. 

Although a majority of stocks will follow the trend of the market there are always exceptions as money flows into different sectors.  The Steel sector has been very strong for several months and stocks within this sector have done very well especially those which have been exhibiting strong Sales and Earnings Growth.  An example of one stock which has done very well is IST.

Notice how IST has seen accelerating Sales and Earnings Growth over the past few quarters and has doubled in price after breaking out of a "Cup and Handle" pattern in June. 

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