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Weekend Stock Market Analysis

(2/26/05)

The major averages avoided potential trouble last week as they were able to rally after the big down day last Tuesday.  The Dow held support at its 50 Day EMA (blue line) last week and is now approaching previous upside resistance just below the 10900 level.  The question is will the Dow stall out for a third time near the 10900 area or will it be able to break through this time?   

If the Dow is able to break solidly above the 10900 level then its next major upside resistance area would be in the 11200 to 11300 range which is where it peaked in 2001 (point A).

Further upside action in the Dow will likely depend on what the price of Crude Oil does in the days ahead.  Remember the price of Crude Oil and the Dow have been generally going in opposite directions during the past year or so.  When the price of Crude Oil has risen (points B to C) the Dow has come under selling pressure (points D to E) and when the price of Crude Oil has dropped (points C to B) the Dow has rallied (points E to D).

If the price of Crude Oil stalls out in the lower to mid 50's and then begins to sell off this will likely have a positive affect on the Dow.  However if the price of Crude Oil surges past the mid 50's and heads toward the 60 level this would likely have a negative affect on the Dow. 

The Nasdaq held support above its 200 Day EMA (green line) this past week and is now approaching its 50 Day EMA (blue line) near 2070.  If the Nasdaq can break above its 50 Day EMA then I would look for upside resistance in the 2100 to 2110 area which is where it has stalled out twice before. 

A key sector to watch that will have an impact on the Nasdaq is the Semiconductors.  The Semiconductor Holders (SMH) so far have been encountering resistance near their 38.2% Extension Level (calculated from their January 2004 high to their September 2004 low).  If the SMH's can break above the 34.75 level then look for a rally up to either their 50% Extension Level near 36.50 or their 61.8% Extension Level near 38.50 which would have a positive impact on the Nasdaq.  Meanwhile if the SMH's stall out again near their 38.2% Extension Level and come under selling pressure then this would have a negative impact on the Nasdaq.  

The S&P 500 held support last week just below its 50 Day EMA (blue line) and is now trying to rally back to where it peaked in early January near 1218 (point F).  It will be interesting to see if the S&P 500 will be able to rally above its early January high or whether it will stall out near the 1218 level.

If the S&P 500 is able to take out its early January high then its next significant upside resistance area would be around 1255 (point G) which is at its longer term 61.8% Extension Level (calculated from the 2000 high to the 2002 low).

As mentioned in the past the Banks will likely determine what transpires in the S&P 500 in the days ahead as they are heavily weighted in the index.  The Banking Index (BKX) held support last week at its upward sloping trend line originating from the May low near 98 (point H).  The key level to watch in the BKX next week is around 101 which corresponds to its 50 Day EMA (blue line).  The last time the BKX found support at its trend line and rallied above its 50 Day EMA was back in late October (point I) which led to a significant upward move not only in the BKX but the S&P 500 as well.  If the S&P 500 is going to rise up to the 1255 area mentioned above the BKX is going to have to make a strong move upward above its 50 Day EMA.   Meanwhile if the BKX is unable to break above its 50 Day EMA near 101 and begins to come under renewed selling pressure this would have a negative affect on the S&P 500.  

Finally sometimes you will miss an initial breakout from a favorable chart pattern such as the "Cup and Handle" pattern, however, the strongest performing stocks will usually give you a second opportunity to buy them.  LYO provides a good example of a stock which broke out of a small "Cup and Handle" pattern last August (point J) and continued higher through the end of November (point K).  After making a substantial move upward LYO then began to develop a trading range between 27 and 30 and over the next few months and formed a "Flat Base" pattern.  LYO then broke out of its "Flat Base" pattern four weeks ago and gave investors (including us) who missed the initial breakout last August a second opportunity to buy it in late January. 

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