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Weekend Stock Market Analysis

(1/15/05)

A few weeks ago it looked like Crude Oil was potentially exhibiting a Head and Shoulders Top pattern however this week the price of Crude Oil broke above its 2nd Shoulder (2S).  The question is now will the price of Crude Oil eventually rise back to the late October high in the mid 50's? 

Although most people attributed the recent sell off in the market due to profit taking the recent rally in the price of Crude Oil the past two weeks may have played a bigger role.  Remember over the past year the price of Crude Oil and the Dow have been basically going in opposite directions.  When the price of Crude Oil has rallied (points A to B) the Dow has sold off (points C to D) and when the price of Crude Oil has sold off (points B to A) the Dow has rallied (points D to C).

If the price of Crude Oil does continue to rise and eventually rallies back to its late October high in the mid 50's this could lead to more downside pressure in the major averages.  

As far as the major averages the Dow broke below its 50 Day EMA this week and has dropped around 400 points since the beginning of the year.  In the near term if the Dow attempts to bounce from oversold conditions I would look for upside resistance near 10680 (point A).  Meanwhile if a bounce doesn't occur and the Dow continues lower its next support area resides near 10440 which is where its 100 Day EMA (green line) and 38.2% Retracement Level (calculated from the October low to the December high) reside at.

The Nasdaq remains just below its 50 Day EMA (blue line) and has dropped around 100 points since the first of the year.  In the near term if the Nasdaq attempts to bounce from oversold conditions look for possible resistance near 2120 (point B).  Meanwhile if the Nasdaq doesn't bounce and continues lower its next level of support would be in the 2025 to 2040 range which coincides with its 100 Day EMA (green line) and 38.2% Retracement Level (calculated from the August low to the December high). 

The S&P 500 also dropped below its 50 Day EMA (blue line) this week but did manage to close back above it on Friday.  In the near term if the S&P 500 attempts to bounce from oversold conditions look for initial upside resistance around 1195 (point C).  Meanwhile if the S&P 500 continues lower its next support area would be around 1160 which is where its 100 Day EMA (green line) and 38.2% Retracement Level (calculated from the August low to the December high) reside at.  

A sector to watch will have an impact on the S&P 500 is the Banking Index (BKX) as the Banks are heavily weighted in the S&P 500.  Since peaking in late December the BKX has been hit rather hard and has recently dropped below its 100 Day EMA (green line).  A key support area to watch in the days ahead would be in the 98 to 99 range which coincides with the BKX's 200 Day EMA (purple line) and upward sloping trend line (solid black line) from the May low.  If the BKX breaks below its upward sloping trend line this would spell trouble not only for the BKX but the S&P 500 as well. 

Finally when looking for stocks to invest in focus on those that are exhibiting decent Sales and Earnings Growth versus those that aren't.   For example let's compare the Sales and Earnings Growth trends of AEOS versus MSFT over the past two years.

During the past two years AEOS saw an acceleration of Sales and Earnings Growth from 2003 into 2004 as it developed a longer term Cup and Handle pattern.  AEOS eventually broke out of its Handle (H) last Summer and has been in a steady up trend since then.  In 2004 AEOS gained nearly 200%. 

Meanwhile if we compare the Sales and Earnings Growth of MSFT to AEOS you can see in 2004 MSFT has been experiencing decelerating Sales and Earnings Growth.  In fact outside of a few good quarters in late 2003 and early 2004 MSFT hasn't seen any decent Sales or Earnings Growth going back through at least 2002.  This has been reflected in MSFT's performance over the past few years as its current stock price (point D) is basically the same as it was in late 2002 (point E).     

This is why it's important to focus on those companies which are showing an increase in Sales and Earnings Growth versus those that aren't.    

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