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Weekend Stock Market Analysis

(2/14/04)

In the near term it looks like the Dow and S&P 500 may have formed small Double Top patterns.  If the Dow remains under some selling pressure the first important support area to watch is around 10400.  The 10400 coincides with the Dow's 50 Day EMA (blue line) and was also near the lows made in January (points A and B).

As for the S&P 500 if it comes under more selling pressure the key support area to watch is around 1120.  The 1120 is near the lows made in January (points C and D) and February (point E) and is also where the 50 Day EMA is approaching.   

The Nasdaq which peaked in mid to late Jaunary has stalled out after finding support last Friday just below its 50 Day EMA (point F) near 2010.  If the Nasdaq fails to hold support at its 50 Day EMA near 2040 then it will likely retest last Friday's low.   

Although it looks like the Dow and S&P 500 may have made a top in the near term if we look at the charts from a longer term perspective a few things stand out.  First the Dow has encountered some longer  term resistance around the 10700 area which was near the high made in 2002 (point G) and corresponded to the 76.4% Retracement Level calculated from the early 2000 high to the October 2002 low.  However it also appears the Dow has now traced out the right side of a 21 month Cup.  What we would like to see now is for the Dow to work on developing a constructive Handle over the next several weeks.

Meanwhile the S&P 500 has encountered some resistance at its 50% Retracement Level calculated from the early 200 high to the October 2002 low in the 1155-1160 area.  However just like the Dow it appears the S&P 500 has also formed the right side of a 21 month Cup and now needs to work on developing a constructive Handle in the weeks ahead.

As for the Nasdaq it also appears to have formed the right side of a 2 year Cup and has been working on a small Handle (H) over the past 4 weeks.  The key thing to watch in the Nasdaq over the next few weeks is to see if it can hold support at the bottom of its Handle near 2000.  If the Nasdaq doesn't then this would negate the Handle and could lead to a larger correction. 

Meanwhile continue to watch the Semiconductor sector closely as well.  If the SMH's fail to hold support at their 100 Day EMA (green line) near 40.50 then they could drop back to their 200 Day EMA (purple line) which is currently near 37.50.

For those of you that follow the Gold and Silver sector the XAU has found support near its 10 Monthly EMA which is close to its 200 Day EMA on a daily basis.  It still appears to me that the XAU has formed a 6 year Cup and is beginning to develop a small Handle (H).  For the Handle to remain constructive the XAU needs to hold support around the 93 level.  If the XAU breaks below this level then the Handle would be negated. 

When the market goes through a consolidation/correction period its very important to notice which stocks are holding up well versus those that aren't.  Those stocks which break out first as the market begins to rally will usually end up being the leaders.  Notice below how the Nasdaq developed a trading range from last October through December between 1890 and 2000.   Meanwhile notice how RIMM also developed a trading range between $42 and $48 as well during the same time period.   When the Nasdaq broke out of its trading range in late December so did RIMM which then doubled in price over the next 8 weeks.  Although this was an extreme case it does show the importance of noticing which stocks are holding up well during a consolidation/correction period.

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