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Weekend Stock Market Analysis

(1/8/05)

Last week I mentioned that since 1900 when the year ends in the number "5" the Dow has always been up significantly.   Meanwhile I'm also sure some of you have heard that the market's performance in January will give a clue to how the year will end up.  Well I went back and researched that this week and here is a quick breakdown.  Since 1928 there have been 52 times when the month of January has had a positive return for the Dow.  Out of those 52 years 42 of them (81%) saw the Dow having a positive return for those years while 10 of them (19%) didn't.  Meanwhile when the Dow had a negative return during the month of January which has occurred 24 times sine 1928 the Dow had a negative return for the year on 16 occasions (67%) while the other 8 occurrences (33%) ended up having a positive return.  Thus from a statistical standpoint since 1928 there is a rather high probability than when the Dow has a positive return in the month of January that the year will end up positive as well 81% of the time.  Of course there will always be some exceptions however I was actually surprised to see such a high percentage.     

At any rate so far 2005 hasn't started out well as the major averages came under some pretty strong selling pressure this week.  The Dow has dropped back to its 23.6% Retracement Level (calculated from the late October low to the late December high) however it still remains just above its 50 Day EMA (blue line) near 10550.  If the Dow can hold support near its 50 Day EMA then this could lead to an eventual oversold rally.  However if the Dow breaks below its 50 Day EMA this would likely lead to a larger drop back to the 10400 to 10420 range which is where its 100 Day EMA (green line) and 38.2% Retracement Level come into play at.

The Nasdaq got sold off hard this week and dropped below its 50 Day EMA (blue line) on Friday.  If the Nasdaq can find support early next week at its intra day low on Friday near 2076 this could lead to an oversold bounce.  However if the Nasdaq continues to drop instead then its next area of support would be in the 2020 to 2040 range which coincides with its 38.2% Retracement Level (calculated from the August low to the late December high) and 100 Day EMA (green line). 

The S&P 500 has dropped back to around the 1180 level which is where its 23.6% Retracement Level (calculated from the August low to the late December high) and 50 Day EMA have converged at.  One of two things will probably happen in the S&P 500.  Either the S&P 500 will hold support near 1180 and then undergo an oversold bounce or it will break below 1180 leading to a drop back to the 1160 area which is where its 38.2% Retracement Level and 100 Day EMA (green line) reside at.  

Meanwhile even if the major averages can hold support near their current levels and then undergo an oversold rally it still appears that they are potentially exhibiting the final upward wave in conjunction with an Elliot 5 Wave Pattern.

Also the current chart of the Nasdaq looks similar to the chart of the Dow in the 1930's as the Dow completed its 5 Wave Pattern in the early part of 1934 after making a bottom in 1932.  Furthermore once the Dow completed its 5 Wave Pattern it then got stuck in a trading range between 85 and 110 from 1934 through the early part of 1935 before rallying strongly from the middle part of 1935 into 1936.  Of course this doesn't necessarily mean the Nasdaq will act like the Dow did in the 1930's however their chart patterns are similar. 

As far as a few sectors the Semiconductors continue to act poorly as the Semiconductor Holders (SMH) had a rough week.  If the SMH's continue to breakdown they have a key longer term support area near 28 (point A) which is at their 61.8% Retracement Level (calculated from the late 2002 low to the early 2004 high).  If the SMH's continue to trend lower this will likely lead to additional selling pressure in the Nasdaq.

For those following the Gold and Silver sector (XAU) the XAU broke below a key support level this week at their 40 Weekly EMA (blue line).  If the XAU continues to trend downward its next support level would be at its longer term 38.2% Retracement Level (calculated from the 2000 low to the early 2004 high) near 86 (point B).

Finally although quite a few stocks got hit hard this week continue to focus on those which are holding up well and developing a favorable chart pattern.  I recently noticed that NICE has completed the right side of a 12 month Cup and now needs to develop a constructive Handle over the next few weeks.

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