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Weekend Stock Market Analysis

(1/22/05)

Although 2005 has started out well, from a longer term point of view, the major averages had rallied significantly after making a bottom in October of 2002.  In October of 2002 the Dow was around 7200, the Nasdaq near 1100 and the S&P 500 was around 770.  Meanwhile by late 2004 the Dow was near 10900, the Nasdaq was around 2190 and the S&P 500 near 1220.  Thus over a span covering a little more than two years the Dow had gained 51%, Nasdaq nearly 100% and the S&P 500 around 58%.  

As I have talked about before it does appear the major averages may be completing an Elliot 5 Wave Pattern and we are beginning to see the early stages of an ABC correction.  Once again for those not familiar with what an Elliot 5 Wave Pattern looks like a simple chart is shown below.  Notice after the 5 Wave Pattern completes itself this is followed by an extended ABC correction.

If we look at a longer term chart of the S&P 500 it does show some similar characteristics to the chart above.

In the near term the major averages are rather oversold and we will probably see a sharp oversold bounce occur at some point.  Over the past year when the %K Line associated with the Slow Stochastics has dropped to 20 or below (points A) this has been a fairly reliable signal of a potential bounce from oversold conditions (points B) as shown by the weekly chart of the Nasdaq below.  So this is something I will be watching for over the next week or two.

As far as the major averages the Dow failed to hold support at its 100 Day EMA (green line) near 10440 last week and its next major support area is at its 200 Day EMA (purple line) near 10300.

The Nasdaq has failed to hold support at its 100 Day EMA (green line) last week just above 2040.  The next major support level for the Nasdaq is at its 200 Day EMA (purple line) near 2000.  

As far as the S&P 500 it still remains above its 100 Day EMA (green line) which is just above 1160.  If the S&P 500 fails to hold support near 1160 then its next major support area would be at its 200 Day EMA near 1140. 

Although the market hasn't started out well in 2005 continue to maintain a list of stocks which are acting well and developing a favorable chart pattern.  NICE from our Stocks to Watch List has now developed a small constructive 3 week Handle (H) after forming a Cup.  

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