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Weekend Stock Market Analysis

(12/10/05)

The major averages have been basically in a consolidation/pullback mode for the past two weeks after rise strongly the previous five weeks.  The price of Crude Oil has been rallying since the first of the month which may be partly responsible for the consolidation/pullback that has developed.  In the past when the price of Crude Oil has rallied (points A to B) the Dow has generally dropped (points C to D) and when the price of Crude Oil has dropped (points B to A) the Dow has generally risen (points D to C).

 

Currently the price of Crude Oil has risen back to its 50 Day EMA (blue line) and it will be interesting to see what transpires over the next few weeks as one of two things may eventually develop.  The first thing that may occur is for the price of Crude to stall out near its 50 Day EMA and then eventually come under more selling pressure leading to a drop back to the mid 50's which is where it found support at a few weeks ago (point E).  If this scenario were to develop then I would expect this to have have a positive impact on the major averages as we end the year and move into the early part of 2006.  Meanwhile the second possibility would be for the price of Crude Oil to break strongly above its 50 Day EMA leading to a rally back to the mid to upper 60's which would likely have a negative impact on the major averages in the longer term.  

As far as the major averages the Dow has dropped back to its previous resistance area just above 10700.  If the Dow can hold support near the 10700 area then I would look for it to eventually rally back to to where it stalled out at a few weeks ago near 10980 by the end of the year.  Meanwhile if the Dow fails to hold support near 10700 then its next support area would be at its 50 Day EMA (green line) near 10650. 

The Nasdaq has been holding support so far at its 20 Day EMA (blue line) near 2230 and above its previous early August high around 2220.  As mentioned in the Mid Week Analysis the Nasdaq is exhibiting a similar pattern that occurred early in the Summer when it rallied strongly for a month (points F to G).  This was then followed by a choppy four week trading range (TR) before the Nasdaq began another move higher (points H to I).  Currently the Nasdaq has been in a choppy trading range over the past two weeks and if it can break above the 2280 area then it may rise up to 2330 to 2350 range.  Meanwhile if the Nasdaq drops below its 2220 support area then the next level of support would be at its 50 Day EMA  (green line) near 2190. 

The S&P 500 has been holding support above its previous early August high and 20 Day EMA (blue line) just above 1245 while developing a choppy two week trading range.  If the S&P 500 breaks out of this trading range then I would expect a move up to the 1300 to 1315 range.  Meanwhile if the S&P 500 drops below the 1245 level then its next level of support would be at its 50 Day EMA (green line) near 1235.

For those of you following the Gold sector (XAU) the XAU has broken out of a Double Bottom and Handle pattern. 

 

If the XAU can break above its longer term 76.4% Retracement Level near 130 (point J) then it may eventually rise up to the high made in 1996 around 155.

Finally I have seen PEOPLE claiming that you can now buy stocks breaking out of a Cup pattern without forming a Handle.  Although this may work for a few stocks in most cases this will lead to a failed breakout attempt.  I still believe that it's better to wait for a stock to develop a constructive Handle and then buy it as its breaking out of its Handle.

A recent example was QDEL which formed a nice longer term Cup but never developed a proper Handle before moving higher (points J to K) and then sold off  the past two weeks (points K to L).  

Now lets look at a stock which did develop a constructive Handle before breaking out.  HP formed a long term Cup and then developed a 15 week Handle before breaking out last June and continued higher for several weeks (points M to N).

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