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Weekend Stock Market Analysis

(2/18/06)

The major averages rallied this week which was likely in response to the drop in the price of Crude Oil which has fallen over $10 since late January.  Meanwhile it appears Crude Oil could be developing a Double Top pattern with the key support level to watch over the next few weeks at the 58 level.  If the price of Crude Oil is unable to hold support near the 58 level then look for its next area of support at the low made last May in the lower 50's (point A).  Thus if the price of Crude Oil were to eventually drop back into the lower 50's at some point this would likely have a positive affect on the major averages in the longer term.    

As far as the major averages the Dow has avoided a potential Head and Shoulders Top pattern as it broke above its 2nd Shoulder this week and rallied to a new 52 week high.  

If the Dow is able to trend higher it appears its next area of longer term upside resistance would be in the 11350 to 11400 range which is where it stalled out at in 2001 (point B).  Keep in mind if the Dow is going to reach this level that the price of Crude Oil will likely have to break below the 58 support level as mentioned above.  

The S&P 500 also rallied strongly this past week however it still remains just below its early January high near 1295.  

If the S&P 500 can break above its previous high near 1295 then this could eventually lead to a rise up to either the 1315 area (point C) which is where it stalled out at in early 2001 after rallying from oversold conditions.  

As far as the Nasdaq it still remains below its early January high which was just above the 2330 level but has risen back above its 50 Day EMA (blue line).  If the Nasdaq can maintain support at or above its 50 Day EMA which is currently around 2260 then it could eventually rally back to its early January high at some point.     

Meanwhile as mentioned over the past few weeks the Semiconductor sector is a key sector to watch which will have an impact on the Nasdaq.  The Semiconductor Index (SOX) has completed the right side of a 2 year Cup and has now developed a small 3 week Handle (H).  If the SOX can break out of its Cup and Handle pattern to the upside then I would expect a move up to the 640 level which is where it stalled out at in 2002 (point D).  If this were to happen then this should give the Nasdaq a boost to the upside as well.  On the other hand if the SOX fails to break out of its developing Cup and Handle pattern to the upside and breaks down instead then that would have a negative affect on the Nasdaq.  

Finally during the past few weeks there has been an increasing number of stocks forming a Cup such as VICR and ZRAN for example from our current Stocks to Watch List.

 

Remember once a stock forms a Cup it then needs to develop a constructive Handle over a period of time to complete a favorable "Cup and Handle" pattern.  For example a stock we featured late in 2005 was AKAM which had formed the right side of a 21 month Cup and then developed a 5 week Handle (H) before breaking out last November.  Since breaking out of its "Cup and Handle" pattern last November AKAM has gained nearly 50%. 

 

In 2005 our Long Term Investing Strategy finished up 31% while our Short Term Investing Strategy ended up 64%.

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