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Weekend Stock Market Analysis
(1/7/06)
As 2005 ended it looked like the major averages were beginning
to break out of their choppy consolidation patterns to the downside however they
reversed strongly to the upside instead for the first week of 2006. The
Nasdaq which had been in a choppy trading range (TR) all of December briefly
dropped below its previous early August high near 2220 and its 50 Day EMA (green
line) early on Tuesday (point A) but then reversed strongly to the upside the
rest of the week and closed at a new 52 week high. Keep in mind the same
type of action occurred last June as the Nasdaq developed a choppy trading range
(TR) after rallying strongly in the month of May (points B to C). Next the
Nasdaq then began to rally in early July and then proceeded to rise over 170
points before peaking in early August near 2220 (point D). Meanwhile
with such a big move this week the Nasdaq may pullback some next week and look
for support at the early December high around 2278. 
If the Nasdaq does undergo a
similar pattern like occurred last July then it may eventually rise up to the
2360 level by mid to late January which would be a 170 point gain from the low
made on Tuesday near 2190. As for the Dow it was able to hold
support near the 10700 level and has risen back to the 10960 area which is where
it peaked at in early March. In the near term if the Dow does briefly
stall out near the 10960 level before moving higher I would expect it to find
support at its 20 Day EMA (blue line) near 10830. 
Meanwhile if the Dow is able to
break solidly above the 10960 area then its next area of upside resistance may
occur in the 11300 area which is where it stalled out at in 2001 (point E). 
The S&P 500 which held support
early in the week at its previous early August high and 50 Day EMA (green line)
near 1245 has rallied to a new 52 week high. In the near term if a brief
pullback does occur next week I would expect the S&P 500 to remain at or
above its 20 Day EMA (blue line) near 1263. 
Meanwhile if a brief pullback does
occur which is then followed by more upward movement the next area of upside
resistance for the S&P 500 appears to be around the 1315 area. The
1315 level is where the S&P 500 stalled out at in May of 2001 (point F)
after undergoing an oversold bounce. 
Although the major
averages have rallied strongly the first week of 2006 and may continue higher
through the middle to latter half of the month, as mentioned last weekend, I'm
still concerned with a couple of things for the longer term. The
first thing to watch is the Volatility Index (VXO) which is still pretty low
however it still remains above its July low which was just above 9 (point
G). If the S&P 500 does continue higher this month and the VXO
eventually drops back or below its July low that would be a strong signal of a
nearing top much like occurred in early August (point H) which was then followed
by a correction that lasted until mid October (points H to I). 
Meanwhile the second thing to watch
is the price of Crude Oil which appears to have developed a potential bottom. In the past when the price of Crude Oil has gone through a
correction (points J to K) and then eventually rallied to a new high (points K
to J) this has led to the development of selling pressure in the Dow (points L
to M). Thus watch the price of Crude Oil over the next several weeks as a
rise above its late August high would likely have a negative affect on the major
averages in the longer term. 
Finally if the major averages
continue to act well this month focus on those stocks which are breaking out of
a proper chart pattern. ZUMZ is a stock which we noticed had completed a
Double Bottom pattern in October and then broke out of a 4 week Handle in late
November and has been performing well. 
Remember the best chart patterns to
look for are the "Cup and Handle", "Double Bottom" and Flat
Base.
For 2005 our Long Term Investing Strategy finished up 31% while
our Short Term Investing Strategy ended up 64%.
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